China will, sooner or later, allow its pension funds to invest overseas to help grapple with the challenge of how best to support its rapidly ageing population, though the timing will hinge on broader macroeconomic conditions.

Zhou Xiaochuan

Zhou Xiaochuan, former governor of the People’s Bank of China, voiced his support for the move in late December. The financial heavyweight’s comments reassured some market participants that China is actively considering allowing pension funds to invest overseas.

Domestic investments may lack projects that deliver the highest investment returns. Pension funds’ globally diversified investments can avoid this problem, Zhao said in a public forum.

Mostly known as a reformist who had helped to liberalise China’s trade and investment rules, to reform the exchange rate regime, and to ease exchange control, Zhou was a long-standing governor of China’s central bank from 2002 to 2018.

At the moment, only the Rmb2.24 trillion ($323.3 billion) reserve National Social Security Fund (NSSF) is allowed to invest overseas. Neither pension assets managed by provincial governments or corporate pension plans are allowed to do so. If their pension assets could be invested overseas, then not only would it help China’s pension funds to lift returns, but it would also provide a lot of opportunities for global asset managers.

The market has been calling for rules surrounding pension funds’ overseas investments to be relaxed, but it hasn't happened yet mainly because of capital controls, Wu Haichuan, Shanghai-based head of retirement business for Greater China at Willis Towers Watson, told AsianInvestor.

Nevertheless, a number of high-level officials or executives who are close to the regulator have been openly talking about it for the last two to three years. This should deliver the message that allowing pension funds to invest overseas is something that will happen ultimately, though timing will depend on how the economy is faring, he said.

In fact, Xu Jinghui, former chairman of China’s third-largest insurer CPIC Life and who also served as former chairman of CPIC Life’s pension unit Changjiang Pension, said as long ago as 2018 that pension funds should be allowed to invest overseas.

Given that domestic economic growth is likely to slow down and that market risks are higher, it is essential to explore the global diversification of pension funds to diversify risks and to improve returns, Xu said. 

In 2018, the Ministry of Human Resources and Social Security (MoHRSS) also hinted that corporate pension assets would be allowed to invest overseas. Then when China regulators revealed that they were planning to let foreign financial institutions become dedicated corporate pension managers in July last year, some market participants believed that this could pave the way for funds being allowed to invest some of their assets overseas.

SOE STAKE TRANSFER

Last year, China kick-started its grand scheme to transfer assets from state-owned enterprises (SOEs) into its public retirement system to bolster its pension system after a two-year trial run.

Zhou believes, however, that the 10% stake may not be enough, and that there will have to be other means to make up for the shortfall, he said at the same event. He did not elaborate further.

The asset transfer is definitely not enough, which makes it more pressing to allow pension funds to invest overseas, Wu said.

Enterprises owned by the central government had to transfer 10% of their equity stakes into NSSF by the end of 2019, according to a joint release published by five regulatory bodies that include the Ministry of Finance, MOHRSS and others.

Enterprises owned by local governments must do the same, passing over 10% of their stakes to provincial pension funds by the end of 2020. Each provincial government has to set up a new entity that it solely owns to hold, manage and operate these transferred state-owned assets, or alternatively appoint a qualified firm to manage the assets via segregated accounts. 

The funding gap in China’s pension system is estimated to reach Rmb890 billion this year, according to the National Academy of Economic Strategy, while the stake transfer from 59 centrally owned SOEs is expected to transfer about Rmb660 billion-worth of assets to the NSSF.