Local governments in China are accelerating their transfer of provincial pension assets to the National Council for Social Security Fund (NCSSF). However, it is unlikely these assets will be invested overseas any time soon, courtesy of Beijing’s inclination to keep the assets on-tap amid the pandemic and its desire not to let onshore funds invest into an increasingly hostile US.

In the first half of the year, 22 provinces signed investment mandate contracts to transfer assets worth Rmb948.2 billion ($135.62 billion) to NCSSF, the China’s Ministry of Human Resources and Social Security (MoHRSS) said on Tuesday (July 21).

This follows on from 19 provinces having already delegated Rmb966 billion to NCSSF as of September 2019 since an asset transfer scheme was started on a trial basis in 2011, according to a KPMG report released in March this year.

This trend is set to continue. China’s cabinet "has approved plans" for the state manager to invest provincial pension funds worth about Rmb2 trillion for local authorities, Reuters reported last month, citing unnamed sources. It is uncertain whether this sum incorporates the Rmb966 billion already managed by the NCSSF or the Rmb948 billion agreed to be transferred this year.  

AsianInvestor reported in August last year that NCSSF is set to play a bigger role in helping local governments manage their assets in order to help to meet the retirement needs of its rapidly aging population. This should help third-party asset managers too.

China’s public pension system (pillar one) is made up of the reserve Rmb2.23 trillion ($320 billion) National Social Security Fund (NSSF), which is managed by NCSSF, plus some Rmb3 trillion of provincial pension assets overseen by local governments.

While provincial pension funds can only buy into bank deposits or local bonds, NCSSF can also invest the funds it has been assigned into the local equity market. The superior returns it has been able to gain as a result encouraged local governments to transfer assets to it in the pilot scheme, which was formally approved in 2015.

As part of its mandate, the NCSSF guarantees the local provincial funds will get a guaranteed return rate over the period it manages their assets. To maximise the chances of meeting this it tries to ensure the assets it invests into have a 95% probability of offering positive returns. As a result the state pension investor can only put a maximum of 30% of provincial pension assets to equity, and it can only allocate up to 14% of the assets it is given to external equity fund managers. 


One way NCSSF could potentially improve the diversification of provincial pension funds would be to invest them internationally.

Currently China does not allow provincial pension funds to invest offshore, but until this year hopes were rising that Beijing would allow NCSSF to invest provincial government funds offshore fairly soon. Zhou Xiaochuan, former governor of the People’s Bank of China, voiced his support for the move last December, which convinced some market participants that China was considering such a move.

However, while the spread of Covid-19 and the subsequent stock slide in the China A-share market in May might have hastened the decision to transfer assets to the state pension manager, it is also likely to have put back any plans to allow assets offshore.

Beijing uses state pension funds and large insurance companies as part of a “national team” of investors to manipulate the stock market whenever necessary, and it is highly likely it will want all of their firepower on hand in case of emergency amid the pandemic.

The central government also sometimes uses NCSSF and the national team to help throw water on overheating stock markets. They are being called to do so right now, following a bull run of the China stock market during July as a result of signs of an early economic recovery and a growing inflow of foreign funds. Fears that these factors will create market bubbles prompted two state-owned institutional funds to trim their stock positions on July 10, in an effort to cool the rally.

There is another good reason Beijing will not want to let its pension funds invest offshore at this moment: geopolitical tensions.

Both the US government and some members of Congress have pressurised American state-linked investment funds not to invest in China’s A-shares, blaming the country for trying to hide the pandemic’s initial impact and also for increasingly aggressive actions.

Until tensions ease once more, the last thing China’s leaders will want is to see their funds being funnelled into the US, any more than Republican politicians want to see American assets being used to help China grow its economy.

The growing centralisation of China's pension asset investments will remain a strictly onshore affair – at least for now.