ATC Business Casual
Author: Sun Wei, Founder of ATC Initiative
This is my second “ATC Business Casual” writing on the topic of Chinese pension market. (See the first article “Why Pension Reform Makes China Market More Investable?” here) It is necessary because I wish to answer the question from many European asset managers that practically how an international asset manager can participate in Chinese pension asset investment.
This question needs to be answered from two separate perspectives: 1) Chinese pension funds’ overseas market asset allocation; 2) Chinese pension’s domestic market asset management.
Overseas market allocation
For overseas allocation, it is actually quite simple: currently only the Social Security Fund (SSF) part of the pillar 1 asset can allocate its asset into the global market. SSF is a government-established reserve fund for extraordinary expenditure in an ageing society, run by the National Council for Social Security Fund (NCSSF). The rest of the pension system, including Public Pension Funds (PPFs, compulsory pension accumulated at the provincial level) in the first pillar, enterprise annuities and occupational annuities in the second pillar, and all the third pillar private pensions, currently can only invest in the domestic market. But this may soon change.
The size of the SSF at year-end 2017 was RMB2.22 trillion (around USD330 billion) and 7.5% of the assets are invested overseas. According to the regulation, SSF can invest up to 20% of its asset overseas. This means there is still potentially a big chunk of SSF asset for it to deploy to global managers. NCSSF started to hire overseas external managers since 2006 and has since had 3 additional rounds of overseas manager selection. A review of the trajectory may show some light of the trends.
May 2006, NCSSF started the selection of its first batch of overseas asset managers. 10 managers succeeded among 84 who applied.
In 2009, the second batch of overseas managers were selected.
2012 witnessed the third batch of additional managers. 12 were selected. But not all of them are new to the client. Some of them just got extra scope.
2015, there is one small-scale additional inclusion of overseas investment managers:
We can make some observations here:
- When it comes to overseas allocation, SSF seems to favour active management a lot more than passive, although it did use Vanguard in 2015 for passive strategy.
- SSF has not been afraid of trying new asset classes and new markets. Emerging market, natural resources and real estate have all been included in the portfolio.
- While mainly allocating to international names, SSF recently would also show support to Chinese leading managers’ international arms (Dacheng, China Universal).
For those managers who are interested in trying, SSF does have some criteria in overseas manager screening (6 years’ track record, minimum AUM of USD5 billion, etc), but not really too high a threshold. More important for an interested manager is to demonstrate its unique capabilities in a certain area.
Aside from SSF, there has been quite a lot of discussion in the last couple of years about the need to enable other pension sectors to mandate overseas managers. Part of the provincial-level Public Pension Funds (PPFs) has been entrusted to NCSSF and given NCSSF’s overseas investment experience, it won’t be a surprise that these entrusted PPFs would be the next to do global asset allocation. The enterprise annuities, with over 14 years of professional operation in the domestic market already, would also have a good chance to allocate some asset overseas soon. PPFs managed at the provincial level and the occupational annuities (newly introduced pillar 2 component) would need a bit longer time.
Chinese pension’s domestic market asset management
Majority of the Chinese pension assets are invested in the Chinese domestic market and hence many global asset management houses are extremely interested in exploring onshore pension investment businesses.
For an international name, if you are regulated by China Securities Regulatory Committee (CSRC) as a mutual fund manager in China, you can apply to get on the domestic market manager list of SSF, PPFs, enterprise annuities and occupational annuities, all of them. You can also participate in the pillar 3 pension sector by offering pension products (target-date funds or target-risk funds). Many global asset management names have mutual fund JVs in China so they can already participate. However, until recently international managers could only have a minority shareholding in these JVs, which means quite limited control. The new policy is that the overseas shareholding in mutual fund manager JVs can now increase to 51% and in 3 years time can further increase to 100%. Some of the global managers are taking this route to secure a fully controlled mutual fund licence in China gradually, eyeing the pension and other long-term clients.
Many other global managers have chosen another route: establish a Wholly-owned Foreign Enterprise (WOFE) and get the Private Fund Manager (PFM) status by registering with the Asset Management Association of China (AMAC). PFM enables a manager to raise fund from qualified investors (but not from pensions so far), similar to the European AIFM. However, just as the proverb says, “all roads lead to Rome”, according to the rule, a PFM manager can apply to be a CSRC regulated mutual fund manager after 3 years’ of normal operation. The benefit of this route is that you have a wholly-controlled subsidiary from day one to deploy your management and investment strategy without any disturbance, while still have the option to “upgrade” to a full-service mutual fund manager after 3 years’ local experience accumulation.
I know there are too many terms and acronyms in this piece, which makes the reading not that easy. Why not come to join the “China Pension Reform and Long-Term Investment” seminar organized by ATC Initiative in collaboration with KPMG in London on 5th April and listen to the experts from Chinese and European pension sector face to face?