NSSF target for SOE stakes seen as over-ambitious

The chairman of China's securities regulator has reiterated a proposal that as much as half of the stock of listed Chinese state-owned enterprises (SOEs) should be handed to the country's National Social Security Fund (NSSF).

There would be good reasons for such a move, but some market participants feel that to transfer so much equity to the $139 billion institution is not such a good idea.

Speaking at a conference in Beijing last week, Guo Shuqing, chairman of the China Securities Regulatory Commission (CSRC), said 30-50% of the stock of state-owned banks and insurance companies should be allocated to NSSF.

That would be a big jump from the current level of 10%. When SOEs go public, the government shareholders of those companies must transfer 10% of their stake to the fund.

Such a move would help improve corporate governance and preserve and increase the value of the SOEs, said Guo, and would help tackle the under-funding of pensions in China. The retirement system operates a ‘pay as you go’ model, which might face asset-liability mismatches in future, he noted.

However, the target seems over-ambitious and may alienate other investors, says Lillian Zhu, senior analyst at Shanghai-based consultancy Z-Ben Advisors. She also argues that any asset injection should come in gradually.

“The [proposed] quota of 30% to 50% is a bit aggressive," she says. "Some of the state-owned enterprises aren’t totally owned by the state; there are also foreign investors who might not agree with the arrangement."

It would be particularly difficult to win support from other investors if the NSSF were to take more than a 50% stake, as that would give it control.

In addition, raising the SOE stock allocation to the fund by so much would not be easy to implement and could take a very long time. For one thing, the proposal would need to win support from all governmental departments involved.

SOEs have diverse ownership; among others, the State-owned Assets Supervision and Administration Commission and the Ministry of Finance hold stakes in these entities.

In addition to requiring shareholder approval, the plan would need to be rubber-stamped by the Ministry of Human Resources and Social Security, which oversees the NSSF, and from the State Council. Winning support from all these stakeholders isn’t easy, says Zhu.  

Still, other industry players support the proposal as something that would boost the assets of the NSSF. Nathan Lin, managing director of E Fund (HK), agrees it would help to solve the under-funding problem. (The asset manager's parent company, E Fund Management, is one of the external investment managers for the NSSF.)

The proposal would be the next in a series of moves this year to reinvigorate China’s sluggish equity market. For example, the CSRC is moving to raise the renminbi qualified foreign institutional investor (RQFII) quota by Rmb200 billion and to boost the QFII quota.

The NSSF is the fifth largest pension fund in Asia-Pacific by AsianInvestor data and, of its $139 billion in AUM, 58% is managed in-house and 42% by external managers, according to the NSSF annual report.