Social Security Fund Gets Green Light for Offshore Investment

The Ministry of Finance (MOF), Ministry of Labour and Social Security (MLSS), and People's Bank of China have jointly approved the Provisional Rules for the Administration of Offshore Investment by the National Council for Social Security Fund. The rules, which took effect on 1 May 2006, aim to regulate the offshore investment activities of the National Council for Social Security Fund (NCSSF).

The rules require managers of NCSSF's offshore investments to satisfy six conditions: 1) sound financial position, good credit standing, and with risk control mechanisms that meet the legal requirements and supervisory authorities' requirements of their home country or region; 2) a minimum of six years experience in asset management with a portfolio worth US$5 billion (or equivalent in other currencies) or more during the preceding financial year; 3) practitioners meeting the qualification criteria of their home country or region; 4) sound corporate governance and internal risk control system with standardised business practices; 5) no records of major penalty imposed by supervisory authorities in their home country or region in the past three years; 6) incorporated and registered outside the mainland in a country or region with sound legal and financial supervisory systems, and whose industry supervisory body has signed memorandum of understanding with the China Securities Regulatory Commission (CSRC) and maintains an effective cooperative relationship with CSRC.

The rules stipulate that the offshore investment funds of NCSSF are primarily derived from the proceeds from reducing the holdings of state-owned shares offshore that are submitted to the central coffers in the form of foreign exchange. The share of offshore investment must not exceed 20% of the total asset worth of NCSSF in terms of cost. The scope of offshore investment will be limited to: bank deposits; treasury bonds of foreign governments, bonds of international financial institutions, and bonds of foreign institutions and companies; bonds issued offshore by the Chinese government or enterprises; monetary market products such as negotiable instruments and large-denomination negotiable certificates of deposit issued by banks; stocks; funds; and derivatives such as forward and options contracts and other investment products or tools jointly approved by MOF and MLSS.

According to an informed source at NCSSF, making investment overseas marks a major move at expanding the investment channels and will help diversify risks and maintain and increase the value of the fund. The NCSSF is now actively preparing for making investments offshore.

Since its inception more than five years ago, the social security fund has expanded steadily both in terms of size and investment channels. As of the end of 2005, the assets of the fund were worth Rmb201.02 billion.