Year of the Rat outlook: Will China let its pensions invest overseas?

Every Chinese New Year, AsianInvestor makes 10 predictions about developments that will affect global financial markets and the portfolios of Asian investors, especially asset owners. These developments can focus on asset classes, geopolitical events, or structural issues surrounding particular markets.

In this Year of the Rat outlook, we consider the likelihood that Beijing will relax its investment rules on pension assets.

Will China allow pension assets to invest overseas?

Answer: No

In China, the $323.3 billion reserve National Social Security Fund (NSSF) is the only pension fund that is allowed to invest some of its assets overseas. In contrast, neither the pension funds of provincial governments or corporate pension plans are able to do so, despite holding a combined $1 trillion in assets.

It's also well known that China's pay-as-you-go pension system is not sustainable. Market experts also unanimously agree that were the country’s regulators to let local pension funds put some of their money into overseas equities, bonds and alternative assets, it would greatly enhance their risk-adjusted returns over the long term.

They are also certain that, sooner or later, the country’s pension funds will get the green light to invest some of their assets offshore.

But will Beijing give its nod this year? Unfortunately, probably not. The government is unlikely do so at a time when it feels that it needs domestic institutional investors to help bolster a slowing economy that continues to be beset by the trade war with the US, as well as the latest Wuhan coronavirus outbreak. China’s economy grew by 6.1% in 2019, the lowest annual growth rate in nearly 30 years, and many expect it to slow down further.

So it's understandable why regulators or top political figures are calling on institutional investors to invest in China’s domestic markets to help prop up its economy. In March last year, Jiang Yang, a member of the Chinese People's Political Consultative Conference (CPPCC), proposed to increase the equity investment limit of NSSF from 40% to 60% to help the fund generate higher returns and encourage longer-term funds to flow into China’s capital market.

The China Securities Regulatory Commission also said at least four times last year that it was considering raising the equity investment limit for domestic insurance firms from 30% to 40% – a limit includes both private equity and listed stocks. Such a move would potentially spur Rmb700 billion to Rmb800 billion of insurer funds into the A-share market.

In addition, local regulators have also encouraged domestic insurers to invest in private equity as another means to demonstrate their financial patriotism. 

Any change to China’s blanket ban on foreign investing by its pension funds is only likely to emerge after the trade war is stabilised, the rhetoric dies down and the value of the renminbi stabilises

Any change to China’s blanket ban on foreign investing by its pension funds is only likely to emerge after the trade war is stabilised, the rhetoric dies down and the value of the renminbi stabilises. While there were some glimmers of hope after the phase I trade deal was signed in January, many tariffs remain and tensions could ratchet up once more at any time.

Until tensions diminish, it’s far easier (if less sensible from an investing perspective) for Beijing to talk about the need to use funds to help cushion the economy from potential fallout of trade.  

Added to this is the likely impact of the Wuhan coronavirus outbreak on China’s economy. While Beijing is now making valiant attempts to limit the disease’s spread, combating it will hurt sectors such as travel, offline entertainment such as movie theatres, Macau gaming, restaurants, retail shopping, some manufacturing and properties. 

While it’s unlikely that Chinese pension funds will be permitted to invest offshore this year, pressure is mounting for it to eventually take place.

Indeed, Xu Jinghui, former chairman of both China’s third-largest insurer CPIC Life and its pension unit Changjiang Pension, said as long ago as 2018 that pension funds should be allowed to invest overseas. And in December Zhou Xiaochuan, former governor of the People’s Bank of China, said pension funds can use global investment diversification to limit their vulnerability to underperforming local projects, reviving hope that the investment rules around pension assets will be liberalised soon.

Other regulatory directions, such as the plan to let foreign financial institutions become dedicated corporate pension managers in July last year, also boosted hopes that overseas allocations will happen soon.

Unfortunately, it’s unlikely to happen in 2020. But as China’s need for retirement savings continues to rise, the pressure is growing for the government to let its pension funds pursue one of the most basic pieces of investment advice to maximise returns: diversify.