New investment options set to raise returns, curb risks: experts
China has announced an expansion of the investment scope for its social security fund, a move that will increase returns and curb risks, experts said Thursday.
China's social security fund will be allowed to be invested in local government bonds and corporate bonds and the maximum amount of the fund that can be invested will be increased to 20 percent from the current 10 percent, according to a statement released by the State Council on Wednesday night.
A large percentage of local government debts are set to mature in 2015. To ease the pressure, the Ministry of Finance announced on March 12 a debt-for-bond swap program to reduce local governments' interest payment burden and extend the maturity of their existing debts.
Under the program, 1 trillion yuan ($161.4 billion) of local government debt will be swapped into government bonds with lower interest rates and a longer maturity date.
At the beginning of the debt-for-bond swap program, the local government bonds may not offer high returns to investors as the bond coupon rate has been set at a relatively low level in some regions, but the coupon rate is expected to increase in the coming years, "which would help to increase the fund's investment returns," Tan Ruyong, a professor of finance at Shanghai University of Finance and Economics, told the Global Times on Thursday.
China's local governments have debts of around 12-13 trillion yaun, China's Finance Minister Lou Jiwei said at a panel meeting at the Boao Forum on March 27.
However, Lou noted that China's total government debt accounted for less than 40 percent of the country's GDP by the end of 2014, a relatively low level compared with other economies.
Prior to amendments made to China's Budget Law on August 31, 2014, local governments were not allowed to issue bonds.
The amendments allowed the country's 32 provincial-level regions to issue bonds within a quota set by the State Council and the quota for 2015 is 600 billion yuan, according to the government work report that Premier Li Keqiang delivered on March 5.
Meanwhile, the new social security fund rules increased the maximum amount of the fund that can be put toward trust loan investments from 5 percent to 10 percent, strengthening participation in projects such as affordable homes and infrastructure.
"The new rules will allow the nation's social security fund to become an important financial resource for local government infrastructure construction projects, as the fund can be directly invested in municipal infrastructure projects as well as local government bonds," Jiang Zhen, a research fellow at the National Academy of Economic Strategy under the Chinese Academy of Social Sciences, told the Global Times Thursday.
Previously, the social security fund could only be invested in companies that were centrally administered State-owned enterprises (SOEs), but the new rules allow for it to be invested in subsidiaries of SOEs and in private firms, according to the statement.
Among the expanded investment scope, direct equity investment into credit-worthy private enterprises is expected to bring the highest investment returns for the fund, but it also has the largest investment risk, said Tan.
The State Council statement also said the fund could be invested into interbank certificates of deposit. Tan noted that investing in such deposits would carry lower risks, but would not bring in such large returns.
The country's social security fund, which was founded in 2000, is a supplementary fund for the support of China's aging society, according to the National Council for Social Security Fund (SSF).
The SSF manages a total social security fund of more than 1.2 trillion yuan. Its rate of return in 2014 was 11.4 percent, well above the 6.2 percent rate in 2013, the Xinhua News Agency reported Wednesday.
