More than 30 billion yuan (US$3.6 billion) of fresh funds will gradually enter the market this way and more local pension funds will follow soon.

This is the Chinese Government's first attempt at a securities investment scheme for social security funds, which faced a huge deficit, but were limited to either making bank deposits or purchasing treasury bonds.

The market-driven experiment will start with the national foundation, which was set up two years ago by the State Council as a special agency to handle social security funds and now controls about 80 billion yuan (US$9.7 billion) of funds, said Cui Shaomin, a researcher at the Social Insurance Research Institute of the Ministry of Labor and Social Security.

According to a document drafted by the State Council last June, as much as 40 per cent of the national foundation's funds can be invested in stocks and 10 per cent can be put into bonds.

"Concrete investment activities should start within the year, though the exact timing is still to be decided," said Zhao Xinyu, an official at the China Asset Management Co, one of the six companies chosen in December to be the foundation's fund managers.

Zhao said the chosen fund management companies are still to sign a formal contract with the foundation council to facilitate the investment and relative investment proposals being made.

He stressed that the foundation should target medium and long-term investment, rather than speculate for supposed short-term gain.

If the macro-economic outlook remains robust, this should guarantee better returns than bank deposits or treasury bonds.

He added that the injection of fresh institutional funds will greatly increase fund supply in the bourses and strengthen sentiments after more than a year of bearish market performance.

But, outside the national foundation, many social security funds, including pension funds, medical and unemployment insurance, still belong to local government. These funds are currently banned from entering the stock market, but the curbs will gradually be lifted in the future to ensure better returns, Deputy Labor and Social Security Minister Liu Yongfu told a Shanghai seminar on Monday.

After the national social security foundation's move into stock investments, some of the individual account pension funds, which receive monthly contributions from both employees and employers, will also get access to the bourses.

(China Daily January 22, 2003)