China launched a massive stimulus programme in 2008 in its bid to fend off the ravages of the global downturn. While that largely succeeded, there are now long-standing fears of an asset bubble, particularly in property. Growth is predicted to slow this year to its lowest rate since 1990. The country is in the midst of an anti-corruption drive, which is hitting sales of luxury goods, and air quality is still awful.
While there are many reasons for foreign investors to be down on China, the country is on the cusp of an interesting domestic reform as Enterprise Annuities (EAs), a form of pension saving, take off.
Currently with assets of around RMB600bn (€70bn), they are set to grow to RMB1trn in the next three years or so, according to Prof Zheng Bingwen of the Chinese Academy of Social Sci- ences in Beijing. There are now also sufficient tax incentives for this to become a serious market.
Indeed, EAs and their equivalents do need to become a serious market if China is to rebalance its economy.
EAs are currently a mainstay at state-owned enterprises, but it would be as well if there were uniform arrangements for state and private com- panies; private companies usually favour more flexible savings plans, which allow members to make early withdrawals. Poorly timed liberalisa- tion might harm the nascent EA market, not to mention retirement saving.
But these are early days for EAs and the coun- try has time to adapt investment rules to suit the nascent market. At the moment there are invest- ment strategies for all members but there is room to expand member choice with good quality default funds.
Target-date funds may be of interest, but a programme of member education is necessary if members and sponsoring companies are to make the right choices. This liberalisation will be a slow process – EAs are not going to be investing offshore any time soon, observers say.
In the West, pension funds are now valued more then ever by governments as sources of long-term capital in areas like SME lending, housing finance or venture capital.
China, perhaps counter-intuitively, is also in need of good quality, patient long-term capital. One result of the massive crisis stimulus pro- gramme has been that provincial bank balance sheets are encumbered with exposure to regional infrastructure and other lending.
With sufficient care, investment liberalisa- tion of EAs could help direct patient investment capital to areas where it is needed – to stimulate real private enterprise and not large-scale capital projects or real estate in the coastal cities.
As institutional investors, EA managers could help China’s transition towards a sustainable and more consumer-led economy. They, together with government, the regulator, employers, trustees and members, will all play their part.