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China will try to expand its social security fund in order to address the pressures of an aging society, expected to reach its climax in 2035, Xiang Huaicheng, chairman of China's National Council for Social Security Fund (NCSSF), told the Tenth Credit Suisse Asian Investment Conference in Hong Kong last Wednesday.

NCSSF, established in August 2000, is designated to solve the aging problem and serves as a strategic reserve fund accumulated by the central government to support future social security expenditures. It is now headed by 68-year-old Xiang Huaicheng, a former finance minister (March 1998 – March 2003).

The social security fund grew 9.3 percent last year because domestic stock markets posted the best performance in ten years, but experts don't expect a continuation of the same performance. By the end of 2006, the council had assets on paper of US$41.8 billion (334.4 billion yuan).

Fund shortage

The World Bank estimates that China will need about 9 trillion yuan (US$1.16 trillion) more in funds in 30 years, when the country reaches its aging peak, while a study by the former Ministry of Labor indicates that the figure should be just 2 trillion yuan (US$258.7 billion).

Mr. Xiang explained that China would need to add to the social security fund "at least US$200 billion" (about 1.6 trillion yuan), adding that his council is striving to reach the target within five to ten years.

China's social security fund mainly comes from four sources: appropriation from the central budget, allocation from state asset sales, lottery revenues, and investment earnings. Excluding the allocation from state asset sales, the fund grew 20 billion yuan (about US$2.587 billion) annually over the past several years.

In spite of the huge capital gap, Mr. Xiang feels optimistic, saying that it is important for the government to realize the severity of the problem so they can begin to address it.

Reinforcement from state assets

The transfer of state assets accounts for a large proportion of social security fund, but it has proceeded slowly in recent years. Due to its negative effects on the stock market, the sale of state share through listed state-owned enterprises (SOEs) was halted. In June 2002, the State Council decided to appropriate assets of non-listed SOEs. In 2003, the Third Plenary Session of the 16th Central Committee of the Communist Party of China indicated in its resolution that government will enrich the social security fund in several ways. A special working team was set up in September 2004, composed of officials from the State Administration of State Assets and Supervision (SASAC), the Ministry of Finance, China Securities Regulatory Commission, and the NCSSF.

"Fund appropriation is decided by the central government and nobody opposes it. However, we need a process to study how to appropriate funds and how much," Mr. Xiang told Guangzhou-based 21st Century Business Herald on the sideline of the conference.

The SASAC intends to add to the fund through sales of state shares or profits. However, NCSSF and other government departments hope to obtain a 10 percent stake of domestic listed firms and hire assets management for capital operations. The two sides submitted reports to the State Council separately in the first half of 2006 and the controversy continues.

In March, Lin Yifu, a Peking University economist and vice director of the Economic Affairs Committee of CPPCC National Committee, proposed a new way to reinforce the social security fund. He suggested that the Ministry of Finance should issue long-term special bonds and buy foreign exchanges from State Administration of Foreign Exchange (SAFE). This could be used to increase overseas investments, stabilize the foreign exchange rate, and solve excess liquidity.

Overseas investment

In the second half of 2006, NCSSF selected 10 overseas firms to oversee its outbound investment and appointed Citibank and Northern Trust Bank as trustees. Last December, NCSSF officially initiated oversea investment, mainly on the global stock market, bonds, and foreign exchanges. The investment volume is about US$1.2 billion and is expected to rise to US$1.6 billion by the end of March.

The current figure is only 5 percent of its total, far lower than the 20 percent ceiling. Nevertheless, Mr. Xiang said that his council will not hurry to raise the proportion, attributing the low number to the lack of investing expertise and talents.

"We must invest overseas in order to learn the process," he said.

(China.org.cn by Tang Fuchun, April 4, 2007)