Plans to invest in central enterprises as it seeks steady returns to pay pensions

The National Council for Social Security Fund will invest up to 250 billion yuan ($39.6 billion) in the real economy by 2015, which is a safe way to increase the value of its assets and generate funds to pay retirees, experts said.

The figure was given in a statement on the SSF's website on Monday.

"Investments in central enterprises and sound venture capital and private equity funds have low risks and good returns, and the SSF serves as a strategic reserve fund accumulated by the central government to support future social security expenditures and other social security needs," said Huang Zhilong, an expert at the China Center for International Economic Exchange.

By the end of 2011, the SSF had 868.8 billion yuan in funds under management, and 137.6 billion yuan had been invested in the real economy, the statement said.

Huang noted that provincial social security funds in China can only invest in bonds and bank deposits, meaning they have a low investment return.

With pension payments set to rise, some of these funds could come under pressure, especially if inflation rises.

The Ministry of Human Resources and Social Security and the Ministry of Finance issued statements early this year asking provinces, municipalities and autonomous regions to increase pension payments.

"The SSF plays a role in the adjustment of provincial social security funds, so there is a need for it to boost returns," said Huang.

The real economy is concerned with producing goods and services, as opposed to the part of the economy that is concerned with buying and selling on the financial markets.

Under Chinese regulations, the SSF may make two types of real economy investments: direct equity investment in central enterprises or investment in venture capital and private equity funds registered with or approved by the National Development and Reform Commission.

Direct investment in central enterprises can total up to 20 percent of the SSF's entire funds, while investment in VC and PE funds can account for 10 percent at most.

The statement said the SSF will cooperate more with central enterprises and become a strategic investor when these enterprises are listed or undertake a restructuring, reorganization or refinancing.

The SSF is studying ways to invest in the preferred shares of central enterprises and guarantee steady returns.

By the end of 2011, SSF had invested about 87 billion yuan in central enterprises including Bank of Communications Ltd, Industrial and Commercial Bank of China Ltd, Datang Telecom Technology & Industry Holdings Co Ltd and China National Aero-Technology Import and Export Co, the statement said.

SSF also had pledged to invest 19.7 billion yuan (and had actually invested 12.5 billion yuan) in 13 funds managed by 10 VC and PE firms, including Hony Capital and CDH Investments, by Dec 31.

The "SSF only invested 2.2 percent of its money in the venture capital and private equity sectors, and there is ample room for growth," said Wang Zhongmin, vice-chairman of the SSF, in March.

Wang said the SSF has shown interest in domestic and foreign VC and PE firms.

Chinese companies know local operations better, Wang said, while foreign ones have more standardized rules.

"As China's largest limited partner, the SSF has steady pension funds and seeks long-term returns, so foreign investors are seeking cooperation with the SSF," said Andre Loesekrug-Pietri, chairman and managing partner of the European PE company A Capital.

The Chinese PE market is still in its infancy and is short of strong limited partners. Leading PE companies, including Blackstone Group LP and Carlyle Group, are seeking cooperation with the SSF.

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