Recent Moves by China's Social Security Fund,an Increasingly Important Participant
in Chinese and Global Capital Markets
Eiichi SekineI.

What is the National Social Security Fund?1

The Chinese government initiated broad reforms of its pension system in the 1990s,
introducing individual accounts within the basic pension system 2 and new assetbuilding, defined contribution schemes for corporate pensions. In addition, whilereforming the pension system in the direction of such self-help efforts, the Chinese
government addressed the shortfall in funding of future benefits for social insurance
programs (including the basic pension system) in August 2000 by establishing theNSSF as a safety net.
Established simultaneously with the NSSF to actually manage the funds was theNational Council for Social Security Fund ("the Council") (Figure 1). The Council,
which reports directly to the State Council (the government's cabinet) and has thesame status as other ministries, has a chairman, three vice chairmen, and 13 directors,
for a total of 17 members. There are eight permanent committees (departments) thatreport to the Chairman: General Office, Finance & Accounting, Legal & Compliance,
Investment, Equity Management, Information & Research, Human Resources andAdministrative Service Center. There are also three non-permanent committees:
Expert Appraisal, Investment, and Risk Management.
The NSSF is fund by both central government allocations and investment proceeds.
It makes investments both on its own and through investment management firms, andin addition to domestic investments began investing overseas in 2006, as explained
below. Currently, investments are being added to the NSSF but there are no funds
being paid out.

1

2

2

For an overview of the NSSF, see Chapter 7 (Institutional Investors) of the 2007
Chuugoku Shoukenshijou Handobukku (China Securities Market Handbook) from the
Nomura Institute of Capital Market Research (in Japanese).
Equivalent to the basic pension and Employee's Pension Insurance in Japan.

Nomura Capital Market Review Vol.10 No.3

Figure 1: Management structure for the NSSF
National Council
for SSF

Chairman

Risk Management
Committee

Investment Committee

Expert Appraisal
Committee

General Office

Source:Finance &Accounting

Investment

EquityManagement

Legal &
Compliance

Information &Research

Human
Resources

Administrative
Service Center

Nomura Institute of Capital Markets Research, based on materials from the NSSF.

II. Key points from the 2006 annual report
On the last day of its meeting on 12 April 2007, the Council announced its 2006
annual report and released an overview of its 2007 investment plan. We begin bysummarizing the key points of the 2006 annual report.

1. Expansion of funding sources
At end-2006, the NSSF had total assets of RMB 282.8 billion (approximately¥4.38 trillion;3 a year-on-year increase of RMB 71 billion), and total equity (fixedassets less liabilities)4 of RMB 272.4 billion (approximately ¥4.22 trillion;, a year-onyear increase of RMB 77 billion) (Figure 2).
The RMB 77 billion year-on-year increase in NSSF equity came from agovernment allotment of RMB 58.1 billion, realized return of RMB 19.6 billion, and a
decline in equity of RMB 700 million related to the stock listings of state-owned
commercial banks.
This RMB 58.1 billion budget allotment from the government (up RMB 35.2billion from 2005) comprised RMB 10 billion in a central government budget
allotment, RMB 40.7 billion in proceeds from the sale of state-owned shares, andRMB 7.4 billion in national lottery profits (Figure 3).
34This and all yen-yuan conversions in this report use the mid-rate announced by the State
Administration of Foreign Exchange (SAFE) on 30 April 2007 of ¥100=RMB 6.4441 (RMB
1 = ¥15.51).
Excluding liabilities in the RMB 5.8 billion pension fund of the government's Operations
Department, which handles investments for the NSSF, and in the RMB 4.6 billion ofindividual accounts in the basic pension system.
Recent Moves by China's Social Security Fund,an Increasingly Important Participant in Chinese and Global Capital Markets32. Allocation of investment assets
Investment assets were allocated into three new categories in 2006: overseas
investments,5 investments managed through individual accounts in the basic pension
system,6 and investments in the Bohai Industrial Development Fund.7

Figure 2: NSSF assets(Units: RMB billions)Fiscal year

2000

2001

2002

2003

2004

2005

2006

Total assets

20.0

80.5

124.2

132.5

171.1

211.8

282.8

Fund equity

20.0

80.5

124.2

132.5

166.0

195.4

272.4

Note:
Source:Fund equity = Total assets minus liabilities
Nomura Institute of Capital Markets Research, based on materials from the NSSF.

Figure 3: Government subsidies to the NSSF
(Units: RMB billions)Fiscal year

2000

2001

2002

2003

2004

2005

2006

Total government transfers

20.0

59.5

41.6

4.9

27.9

22.9

58.1

Central government
budget allotment

20.0

47.3

30.4

0.0

17.1

10.0

10.0

12.2

8.8

0.4

4.7

8.3

40.7

2.4

4.5

6.1

4.6

7.4

Income from sale ofstate-owned shares
National lottery profits

Source:56

74

Nomura Institute of Capital Markets Research, based on materials from the NSSF.

The global custodians were selected on 9 October 2006, and the overseas investment
managers were selected on 29 November 2006, with well-known financial institutions andfund management companies based in Europe and the US named for both roles.
In December 2006, the NSSF took over the investment management of central
government allocations to the individual accounts within the basic pension system for nine
local governments, including the City of Tianjin. The investment management agreement
includes a guaranteed annual return of 3.5%.
This is a yuan-denominated investment fund established by the government aimed atindustrial development of the City of Tianjin and other areas surrounding the Bo Hai Bay.
The NSSF contributed RMB 1 billion out of a total of RMB 20 billion in funds.

Nomura Capital Market Review Vol.10 No.3

On a book value basis, managed assets at end-2006 included deposits, government
bonds, and financial bonds of RMB 150.1 billion (53.08%), corporate bonds of RMB
19.5 billion (6.88%), corporate stocks of RMB 68.3 billion (24.16%), stock in nonlisted companies and other equity investments of RMB 34.1 billion (12.07%), andsecuritized products of RMB 1.6 billion (0.57%).
Based on market value, the NSSF had total assets at end-2006 of RMB 326.8
billion (approximately ¥5.06 trillion), including fixed-income products of RMB 149.9billion (45.86%), corporate stocks of RMB 111.9 billion (34.24%), stock in non-listedcompanies and other equity investments of RMB 34.1 billion (10.45%), and cash andcash equivalents of RMB 30.9 billion (9.45%). The assets allocations called for in the2006 fiscal year plan, however, were 55-60% in fixed income, 25-30% in corporatestocks, 10-15% in stock of non-listed companies and other equity investments, and 05% in cash and cash equivalents.
The Council attributed the gap between the planned and actual asset allocations for2006 to several main reasons. It noted first that the higher allocation to corporate
stocks was a result of rising share prices in both domestic and overseas stock markets.
Second, it attributed the higher allocation to cash and cash equivalents to (1) aconcentration toward the end of the year of receipts from the government's budgetary
allotments and of assets managed on behalf of basic pension system individualaccounts and (2) an accumulation of funds caused by delays in receiving approvals
related to trust investments.

Figure 4: NSSF realized rate of returnFiscal year

2002

2003

2004

2005

2006

Realized rate of return (%)

2.75

2.71

3.32

3.12

9.34

Note:
Source:Realized rate of return = realized income / weighted average assets undermanagement
Nomura Institute of Capital Markets Research, based on materials from the NSSF.

3. Record-high profit levels
The NSSF reported realized return for 2006 of RMB 19.6 billion (approximately¥300 billion; a year-on-year increase of 270%) and a realized rate of return of 9.34%(up 199% year on year), record highs in both cases (Exhibit 4). Looking at the timeweighted rates of return, the cumulative average annual realized rate of return since
the NSSF was established is 3.89%, 2.84x the cumulative average annual inflation
rate over the same period of 1.37%. The cumulative realized return (excluding funds
managed on behalf of basic pension system personal accounts) since the NSSF wasestablished is 13.19% of NSSF equity and 15.30% of governmental allotments.

Recent Moves by China's Social Security Fund,an Increasingly Important Participant in Chinese and Global Capital Markets

5III. 2007 NSSF management plan
The NSSF's 2007 management plan is primarily based on drafting and revising
relevant regulations and on reviewing investment asset allocations.

1. Drafting and revising relevant regulations
Draft a new Regulations for National Social Security Fund. The task of drafting
said regulations is included in the State Council's legislative agenda. Accelerate work
aimed at revising the Interim Measures on the Administration of the Investment ofNational Social Security Fund which was promulgated and implemented on 13
December 2001.

2. Review of investment asset allocations
Putting safety first, control risks, strengthen operations, and improve returns.
Although the allocations in its medium- to long-term investment portfolio were set
at (1) 55-65% in fixed-income products, (2) 20-30% in corporate stock, and (3) 1020% in business investments,8 the NSSF decided to change the allocation to fixedincome products to 50-70%.9
Based on this, investment asset allocations for 2007 were set as follows. Fixed
income products shall comprise a minimum of 50% of the portfolio, and the targetedannual rate of return is at least 3.5%. Equities shall comprise a maximum of 30% of
the portfolio, to be obtained through rebalancing and structural adjustments. A
maximum of 20% of the portfolio shall be strategically allocated to business
investments, with a targeted annual rate of return of at least 6%. Cash and cash
equivalents shall be held as close to zero as possible, with a targeted annual rate of
return above the rate paid on a one-year time deposit.

IV. Future trendsOn 26 April 2007, NSSF Vice Chairman Gao Xiqing announced plans to lower
allocation to equities, on a market-value basis, from the current 39%10 to 30%.11 We
think this statement was primarily aimed at reiterating, to both domestic and overseas
audiences, the revised asset allocations published in the Council's April report. TheCouncil's report also indicated that the NSSF plans overall investments in 2007 of8910116The acquisition of shares associated with the listing of critical state-owned enterprises isclassified as business investment.
There has yet to be any announcement as to what adjustments to other investment
allocations have been made to offset the revision in fixed income allocation.
The actual allocation to corporate stocks at end-2006 was 34.2%.
"NSSF sells off shares amid strong market", South China Morning Post, 27 April 2007.

Nomura Capital Market Review Vol.10 No.3

over RMB 100 billion (approximately ¥1.55 trillion). Although the report did notpresent any specific plans concerning the overseas investment activity that the NSSF
began in 2006, there is unlikely to be any change in the trend of the NSSF becoming
an increasingly important participant in both Chinese and overseas capital markets.
The NSSF is also viewed as a lifeline for China's citizens at large, and how
successfully the fund is managed is clearly important from the standpoint of social
security policies.

Recent Moves by China's Social Security Fund,an Increasingly Important Participant in Chinese and Global Capital Markets

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