The rules governing what Chinese pension funds can invest in are too narrow and hinder efforts to meet the funding challenges of an ageing population, according to one of its top officials.

Echoing calls for the country to liberalise its investment guidelines, Li Keping, who sits on the 15-strong board of the National Council for Social Security Fund (NCSSF), last week outlined some of the issues holding back long-term investing in China. 
 
"When we see China's pension fund investment management as a whole, at least as of now we can still see that the formulation of rules and policies tends to be discreet or even conservative," Li said in a keynote speech at a Beijing event to celebrate the 20th anniversary of China's funds industry. 
 
"Under such extremely discreet and conservative policy restrictions the management organisation does not have any room, and to some extent does not have any need, to consider the so-called long-term investment because basically it is just keeping the fund in a range of safe assets and is not real investment," he said in the speech published by wallstreetcn.com on Thursday.

The National Social Security Fund (NSSF) had total assets of Rmb 2.22 trillion ($319.6 billion) as of the end of last year. The NCSSF manages provincial Public Pension Fund (PPF) mandates as well as the central NSSF.

That the pension authorities in China are so guarded partly reflects the high volatility of the country's stock markets, which are dominated by retail investors. So for a long time, the fund was not allowed to diversify its investments and was limited to just treasury bonds and bank deposits, Li said.

Li said asset owners set “very safe” investment targets and risk tolerance levels; they required “guaranteed returns” in investment contracts and mandates, which then tended to distort investment behaviour. 
 
It's only in a theoretical world that one can get guarantees on the downside and still get good gains on the upside, said Stuart Leckie, a Hong Kong-based independent specialist who has advised China on its pension system.
 
To help solve China's long-term funding problems, the NCSSF cap on overseas investments needed to be raised from its current 20% of total assets, he told AsianInvestor.
 

LOW RETURNS

China's NCSSF manages the bulk of assets that make up the first pillar of China's retirement savings system -- compulsory pension contributions made by individuals and managed by the state. Its assets comprise the reserve NSSF and, since 2015, the PPF mandates of different provinces.

In 2014, two-thirds of its assets were kept in cash or deposits. But the biggest restrictions applied to PPFs, which were only allowed to invest in Chinese government bonds and cash. 

From 2012 to 2016 PPFs generated an average annual return of just 2.5%, according to a KPMG report published in November 2017.  The report blamed the sluggish performance of Chinese pension assets on the investment restrictions that directed money towards low-risk, low-return assets and the allocation caps on certain asset classes.

To boost PPF investment returns, some of their retirement assets were brought under the aegis of the NCSSF in 2015 and their investment scope was widened to include listed company shares, with a 30% allocation cap.

As of June-end 2018, a total of 14 provinces, regions, or municipalities had entrusted NCSSF with assets totalling Rmb585 billion ($84.2 billion), of which Rmb 371.7 billion was entered into NCSSF's accounts and invested. The investment yield generated on these assets last year was 5.23%, highlighting the improvement made on previous years.