Chinese welfare fund to invest abroad

[HenryTo]

China has "one-upped" the capitalists once again. Going forward, the Chinese pension system will also be a source of liquidity in the world's markets.
------------------------------------------------------------------------------------
Chinese welfare fund to invest abroad in Q4
Mon Jun 26, 2006 8:27 PM ET

(Adds details, background)

SHANGHAI, June 27 (Reuters) - China's national social welfare fund will start investing in capital markets outside the mainland in the fourth quarter, official media reported on Tuesday.

The National Social Security Fund plans to invest between $500 million and $800 million outside the mainland by the end of 2006, the Shanghai Securities News quoted Xiang Huaicheng, head of the fund, as saying.

"The fund will select managers and trust companies in the third quarter, and hopes to start investment in Hong Kong through managers in the fourth quarter," Xiang said, adding that the fund had received applications to handle its money from over 80 mutual funds, investment banks and brokerages.

The China Securities Journal said that in addition to equities, the fund would invest $100 million to $300 million in fixed-income products outside mainland China. It did not elaborate.

Hong Kong is a major destination for investment by Chinese state-owned companies, and its financial institutions are expected to focus initially on Hong Kong as they begin over coming months and years to put money into capital markets outside the mainland.

Under another programme, the Qualified Domestic Institutional Investor (QDII) scheme, Chinese banks, insurers and other financial institutions will also be allowed to start investing in foreign markets.

QDII is expected to start operating this year, although initial fund flows are likely to be gradual -- individual institutions may receive quotas of just several hundred million dollars -- since Beijing wants to avoid destabilising markets.

Last month, the National Social Security Fund announced criteria for managers to invest abroad on its behalf, including one requirement that foreign fund managers must have at least $5 billion under management and a credit rating of "A" for the past three years.

Investment abroad is among a series of steps designed to bolster China's shaky pension system. State media have reported that Beijing will also shift some of its billions of dollars worth of state-held shares to the retirement system's books.

The Shanghai Securities News said the fund's recent investment in lenders such as Bank of China Ltd. <3988.HK>, Bank of Communications Co. Ltd. <3328.HK> and Industrial and Commercial Bank of China [ICBC.UL] had yielded strong returns.

"The launch of overseas investment will allow the fund to seek better returns and will have a positive impact in building China's social welfare system," the newspaper said.

It had total assets of 211.79 billion yuan ($26.5 billion) at the end of last year, the paper added.

In addition to strengthening the pension system, investment abroad may help Beijing reduce pressure for appreciation of the yuan as outflows of funds partially offset inflows of investment into the country. ($1 = 8.00 yuan)