China's social security fund is expected to enter overseas capital markets in the latest moves by administrators to seek new investment channels, officials said on February 17.

"I believe the social security fund's overseas investment policy will be approved," Frederick Ma, secretary for Financial Services & the Treasury of Hong Kong, told reporters in Beijing on February 17 after meeting with Xiang Huaicheng, the head of the National Council for Social Security Fund (NCSSF).

Ma said he had discussed Hong Kong's investment environment with Xiang and hoped that Hong Kong would be selected as the preferred market for overseas investment by the council, which is very likely.

But the exact timetable and details of the overseas investment plan were not discussed, he said.

If approved, the council would be China's first QDII (qualified domestic institutional investor) to invest in overseas capital markets.

Controlling about 124 billion yuan (US$15 billion) worth of assets by the end of 2002, the council has been seeking investment channels other than bank deposits and bond purchases for higher returns.

By the middle of last year, it formally authorized six domestic fund managers to help it conduct securities investment in the mainland market. But according to policy designations, only a small portion of the fund can be applied for stock investment under risk concerns.

A spokesman with the NCSSF said on February 17 that the council had conducted considerable research and analytical work on overseas investment for the national social security fund, as well as a relative risk control scheme.

But the exact policy and timeframe will be designed by the Ministry of Finance and would then have to be finally approved by the State Council, he said.

It has been reported that the Ministry of Finance had already submitted a detailed proposal to the State Council, which suggested a 4-5 billion yuan (US$483-$603.8 million) initial investment scale by the NCSSF in the Hong Kong market. But the report has not been confirmed by the Chinese authorities, who are still ironing out details in the matter.

"Even after the top leaders give the go-ahead for the proposed plan, whatever it is, there is still a lot of preparation work for us, including choosing the fund managers, custodians and drafting relative regulations to facilitate the practice," the NCSSF spokesman said.

If the social security fund is approved for overseas investment, it may divert some funds from domestic markets in the near term, but the impact will be limited, said Chen Jun, vice-general manager of the Beijing branch of Boshi Fund Management Co, which has been undertaking domestic securities investment for the NCSSF.

How much funding will flow out to overseas markets will largely depend on the expected returns, he said, adding that the recovery of the mainland stock exchange will make such investments more attractive.

For Hong Kong, investment involving the mainland's social security fund will have a positive impact on its financial market in the long run, since the fund is comparatively stable and will add a healthy impetus to the market, said Ben Kwong, associate director at KGI Asia in Hong Kong.

But he did not expect the market shares to be pushed up drastically as the social security fund, with a conservative investment methodology, would enter overseas markets gradually and based on market fundamentals.

Edmond Lee, a strategist at Sun Hung Kai Securities, said it is more likely for the social security fund administrators to choose H-shares, red-chips and individual blue-chips with high market capital and smooth circulation.

(China Daily February 18, 2004)