China has its own challenges and at the Funds World China conference in Shanghai, Xiang Huaicheng, chairman of the national social security fund (NSSF) outlined some of these: an ageing society (10% over 60 now rising to 23% by 2020), rapid population growth and a low level of average earnings ($1,000 in 2003). China’s funds market is only now taking shape.
Xiang says: “We don’t have an accumulation of funds historically, so it is more difficult for China to deal with this problem.” After a sluggish start, the fund management industry is gaining momentum, helped in particular by a new investment fund law, which came into effect in June. This has been accompanied by legislation from the regulatory body, the CSRC.
ATeh-Hsiu Fu, CEO of AIG-Huatai Fund Management, says: “This landmark body of law has made the operation of a fund management company easier, made the administrative processes clearer and has generally enhanced the efficiency for all
There are over 160 investment funds on the market now, with combined assets under management reaching $35bn ( e27bn). There are over 100 open ended funds, with a growing variety of investment mandates including ETFs, guaranteed funds and money market funds.
Fu says: “China’s leaders have proven that reform and development in so large a country is best made incrementally, and with an eye for long-term stable growth. Now, social security and corporate annuity funds and programmes hold a more important place in government than ever before”.
Pension reform in China has moved forward significantly this year, with the introduction of new regulations for individual and employer sponsored accounts, together with the development of a reserve fund, the NSSF.
The NSSF, set up in 2000, is the government’s strategic reserve fund. The fund has 150bn RMB (e14bn) of assets and is funded from three main sources; the central fiscal budget, proceeds from the transfer of SOEs and lottery income. Asset allocation is heavily weighted towards fixed income, with only 4% invested in equities. The NSSF has selected six fund management companies as investment managers, and is going to select additional eight securities companies or fund management companies as investment managers in near future. The state council is currently deliberating on the question of allowing the fund to invest overseas. As soon as this has been ratified, 10bn RMB has been allocated for overseas investment.
Individual accounts are being piloted in Liaoning Province and Jilin and Heilongjiang Provinces. The market is expected to grow to 1,100bn RMB in the next 10 years.
Occupational schemes, known as enterprise annuities, are being given a major push by the Chinese government. New regulations introduced in May this year aim to codify the operation of occupational pension scheme (OPS). They are based on the Australian superannuation model and also on Hong Kong’s Mandatory Provident Fund. Both of these schemes are governed through a trust and have separate bodies providing administration, fund custody and investment management services. The only notable difference in the Chinese scheme is that it is voluntary.
The OPS is expected to provide opportunities to further open up the fund management industry. Both domestic and international fund management companies will be able to manage OPS funds from December 2004.
In terms of size, funds invested in the OP schemes have increase from approximately 19bn RMB at the end of 2000 to approximately 60bn RMB at present. The total amount of pension fund in China including NSSF, individual account pension, corporate pension fund, rural residents pension fund and occupational pension fund for civil servants is expected to reach 3500-4000bn RMB in the next 10 years.
At the moment, OPS funds cannot pool their investments. The Chinese ministry of labour and social security has reserved the right to amend the regulations and there may be scope in future, especially through the use of multi-employer funds such as public offer funds and industry funds.
China is a great example of the rapid change that is taking place in terms of pensions in Asia. As Franck Wiebe, chief economist of the Asia Foundation, puts it: “We now have a diversity of pension systems in Asia that are driven more by ‘outcomes’. The challenge is to match the diversity of structures with the circumstances in each country.”