China May Net Investors as It Overhauls Pension System

TAIPEI (TheStreet) -- No one's sure yet what will happen to China's enormous, clumsy and not-so-fair pension system after an overhaul that's suddenly become top priority. But if Beijing takes its stack of advice seriously, reforms would include more liberal investment of retirement money so that Chinese people actually have some when they retire.

Sino-foreign joint venture asset managers could receive a lot of offers to handle pension funds as a result.

Official pronouncements since the Communist Party decided at a November plenary session to go ahead with pension reforms indicate that more people would be covered, meaning a bump in money both collected and spent.

The poor, rural outback would get in on benefits urbanites already have. People at small companies, not just the richer ones that can afford their own retirement plans, should get a share of the pot. Civil servants would pay into the system, not just take from it. State-owned firms may be asked to double their contribution to public finances to 30% of their profit by 2020.

Debate to date points also to unpopular but slowly phased-in hikes (a couple months per year) in the minimum age for receiving retirement benefits.

Raising ages gets to one of the core reasons to pursue reforms. The system with assets worth 2.4 trillion yuan ($396 billion) faces funding shortages, so to cover more of China's retirees it must do more to keep the money coming in.

This is hardly official yet, but China's National Social Security Fund -- a pension reserve with $176 billion -- may let provincial governments invest more pension money someday, and not just in conservative fixed-interest assets as permitted today.

Provincial pension authorities have pushed central authorities to invest more since the national fund began investing 100 million yuan in Guangdong province's pension holdings in March 2012. That investment has brought back a 7% annualized return from a mix of defensive assets.

To earn stronger returns, the central government may eventually open pension investments to domestic shares, infrastructure, private equity and real estate, says Rita Xiao, consultant at Stirling Finance, a Hong Kong-based pensions and investments adviser.

The Organisation for Economic Co-operation and Development, a nonaligned forum for governments, had recommended even back in 2007 that China invest its pension income in shares and real estate.

The pension reserve fund, one of the world's largest, already allows giving some mandates to external asset managers. More managers would be hired if China invested in riskier assets, particularly offshore.

China likes its own firms, asset managers or otherwise, for security reasons and nationalism but also values offshore expertise for global investments. Given those trends, I expect Sino-foreign joint venture asset managers will receive a lot of offers to handle pension funds.

Specifically, Gottex Fund Management (GTTXF) of Switzerland and its proposed JV partner Shanghai-based VStone Asset Management would have a good shot at grabbing any alternatives mandates. Australian asset management firm AMP Capital might win a shares mandate through its partnership with China Life Insurance Co. (LFC).

Deutsche Bank (DB) and the America International Group (AIG) could rack up some accounts if a Chinese pension fund picked Beijing-based Rongde Asset Management, a company in which the two Western investors have taken a 35% stake via their own JV Cathay Capital.

Mandate sizes? Big. "With China's staggering pension assets, financial liberalization could provide the outlets for investment," China Central Television says in an online report in September. The country's premier, it adds, "has highlighted pension services as a sunrise industry to drive economic restructuring."

At the time of publication the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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