China's Rmb148 billion ($17.9 billion) Social Security Fund has just added four new domestic fund managers as well as its first direct equity investment to its investment programme, says Xiang Huaicheng, chairman of the SSF's National Council. Speaking at a Tokyo conference hosted by the Pacific Pension Institute and the Asia Foundation, Xiang outlined the SSF's challenges in managing its rapidly growing assets.

The SSF was founded in 2000 to deal with China's unique problem of a rapidly greying society, similar to Western countries and Japan, but without the same wealth to pay for it. At that time, 10.3% of China's population was over the age of 60, a figure that will hit 23.3% in 2030.

Worse, by 2030 China will have about 355 million of the 'old-aged' or those elderly who require extensive care. Yet its per capital GDP last year was around a mere $1,000, and unlike Western countries or Japan, China's social security system is brand new and has not been accumulating assets for long.

As a response, the government established the SSF and the National Council to run it, with the aim not to spend this money right away, but to start spending it in 15-20 years, Xiang says. In the meantime, the entity's philosophy is to manage the money prudently, professionally and in a market-oriented way. The SSF has separate committees for investment, risk management and expert appraisal. The investment committee itself is sub-divided to handle internal asset management, and mandates to external professional companies.

The SSF's asset allocation as of December 2003 was 42.9% in structural deposits, 32.3% in government bonds, 11.4% repurchase agreements, 5.9% general deposits, 4.3% equities and 3.2% corporate and financial bonds. Earlier this year, however, the central government's State Council agreed to let the SSF invest abroad. 2004 has also seen the SSF make its first external (domestic) mandates to six fund houses.

Xiang says the SSF mandated an additional four domestic fund management companies last week, although he declined to name them. It has also just added a second custodian, Shanghai-based Bank of Communications, alongside its existing custodian, Bank of China.

And in another first, the SSF made its first direct equity investment in June this year, taking a stake in Bank of Communications.

But the next major step is to invest abroad. Xiang says various regulators are now drafting rules, although he did not say when he expects the National Council to begin mandating external managers. recently reported, however, that the SSF has hired the Asian Development Bank to review potential investment consultants for this work.

Xiang says the other priority is to enlarge the SSF's sources of funding. Current funding sources include revenue from the transfer of state-owned shares by the State Council; budgetary appropriations; and "funds raised by other means". Xiang reiterates his desire for the government to complete its state-owned share transfers as soon as possible. "We want to begin," he says.

But this presents a number of problems. The biggest is the threat of a market crash if the government liquidates a lot of its shares in state-owned companies in order to hand them over to the SSF. "The capital markets have a short history and are not mature," Xiang says.

He notes that before listing, SOEs are usually divided into two parts, and only the best features are reflected in the listed company. "We're looking for a solution," he says.

Nor is it clear what happens to the SSF when it assumes these shares, thus incurring these companies' liabilities such as employee wages and benefits. But, Xiang says, this is a problem for the future, not for today. He acknowledges the SSF may have to carry at least part of the burden of transferred SOE shares, but the need for the SSF's asset base to grow is more urgent.

"Let the State Council transfer these assets to us first, and afterward we'll think about the liabilities," he concludes.