China’s National Social Security Fund (NSSF) plans to allocate to a new type of instrument – interbank negotiable certificates – following approval of its new investment rules, with further liberalisation to come in the next few months.
The Rmb1.5 trillion ($233 billion) state pension is striving to boost returns, having recently also moved to increase allocations to direct equity stakes and private equity funds.
Last Friday the National Council for Social Security Fund (NCSSF) published a speech by its chairman, Xie Xuren, in which he referred to the new rules and outlined the investment plan for the coming year.
China’s State Council published the rules on March 28 to clarify the roles of NSSF and NCSSF; they will take effect on May 1. This represents the first of a series of three moves to implement public pension fund (PPF) reform this year.
Moreover, the move into interbank negotiable certificates – first issued by the central bank in 2013 – was part of plans to use “innovative" fixed-income investment strategies amid the continued fall in yields from traditional debt products, Xie told a board meeting in Beijing on March 25.
He said NSSF needed to reform its investment operation so that could move into new asset classes and instruments.
Market observers had expected this to happen as part of the latest rules, but it will have to wait for another announcement from the Ministry of Finance and Ministry of Human Resources and Social Security (MoHRSS).
The new rules have not yet provided details on NSSF’s investment scope nor on the details of PPF mandates that will be handed out by provincial governments.
The NSSF can invest up to 20% of its portfolio in foreign assets, but such funding is currently limited to the proceeds generated from selling shares of state-owned enterprises held overseas. Moreover, NSSF cannot allocate to direct foreign investment deals or offshore PE funds.
Meanwhile, Shanghai-based Z-Ben Advisors expects the MoHRSS to release details of how the NCSSF will administer the PPF assets within 90 days. This will be the second part of the regulatory process allowing the NCSSF to manage PPF mandates.
The final part of the road map for PPF reform will be the NCSSF’s publication of draft rules on the portfolio model, management systems and compliance, but Z-Ben did not give a likely time frame for this.
Chinese asset owners struggled to add yield last year as the central bank cut the benchmark interest rate six times, from 6% to 4.25%, since November 2014. This led institutions to consider new types of investment to boost returns. For example, Ping An Life increased its exposure to preferred shares, convertible bonds and high-dividend stocks last year, as reported.
Indeed, NCSSF is looking to allocate more to direct stakes and PE funds to improve returns amid public market volatility in February, as reported, said vice-chairman Wang Zhongmin.