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"Smart Money" in Stock Market: Social Security Fund
"Stable returns have made the social security fund the smart money in the capital market."
Over the past half month, the sudden market trend has allowed many investors and institutions to make money that they haven't seen for a long time.
While everyone is showing off their "battle achievements," people are also curious about who the biggest winner of this market trend is.
The most noteworthy is the "national team" - the social security fund, known as the "smart money."
Although there is no direct revenue data, the latest 2023 social security fund annual report mentioned that last year, the social security fund seized the AI opportunities in the overseas market and made a lot of money, while at the same time, it aggressively increased its holdings (bottom fishing) when A-shares were sluggish.
According to the second-quarter social security fund holdings from Tonghuashun, the national social security fund and the basic pension insurance fund and other social security fund portfolios heavily invested in nearly a thousand A-shares, holding a total value of 428.1 billion yuan in listed company stocks.
If calculated based on the increase of the CSI 300, from September 24th to October 15th, the CSI 300 index increased by 18.8%, with the highest increase reaching 23.1%. With the social security fund's 428.1 billion yuan in stocks, it made a profit of 80.5 billion yuan in just 11 trading days.
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In terms of total volume, the total assets of China's social security fund are 28.8 trillion yuan, which is 407.4 billion US dollars according to the exchange rate.
China's social security fund seems very powerful, but according to the latest pension ranking in Singapore's Lianhe Zaobao, the scale of China's social security fund is only 364.4 billion US dollars, ranking ninth in the world, not as good as the "small country" Singapore, whose total provident fund amount reaches 432.5 billion US dollars, far higher than China.Why does China, with such a large economic total, have a social security fund asset amount that is not as much as Singapore's? Is it because the statistical methods of the two countries are different, or is it that our financing channels are not diverse enough, or is it a problem with the ability to manage funds?
Today, we are going to sort out this complex and profitable "social security fund".
Why is the social security fund "smart money"?
What exactly is the social security fund we are talking about?
In fact, it generally refers to two funds, one is the "social security fund", and the other is the "social insurance fund".
The "National Social Security Fund" was established in August 2000 and is managed by the National Social Security Fund Council. It is equivalent to the "reserve force" of China's social pension and security system, which is responsible for saving money and managing finances. In case the pension is not enough in the future, money will be taken out for support.
The responsibilities of this fund mainly have 8 items, simply summarized, that is, "managing and operating the national social security fund, the basic pension insurance fund, and the transferred part of state-owned capital".
Where does its money come from?
First is the central financial budget allocation, the national finance directly gives money as the start-up capital of the social security fund.
Of course, the financial allocation is limited, so some state-owned enterprises and central enterprises are required to allocate some shares into the social security fund. In addition, there are some stocks, funds, bonds, and subsequent investment income, as well as public welfare donations such as lottery tickets.After securing funds, the next goal for the social security fund is to preserve and increase the value of its assets, which is a significant test of the investment capabilities of the fund managers.
The return from bank deposits is too low, so it's definitely not viable. Therefore, after studying investment directions at the time, China decided to learn from foreign experiences and "get into investments." In the second year after the establishment of the fund, the management began to "test the waters" in the stock market and passed the "Interim Measures for the Investment Management of the National Social Security Fund" at the end of 2002.
In the following years, the National Council for Social Security Fund introduced six major funds, including Nanfang, Bosera, Huaxia, Penghua, Changsheng, and Harvest, as managers of the social security fund, and banks such as Bank of China and Bank of Communications as custodians of the social security fund.
To make investments more professional, the National Council for Social Security Fund also established several departments, including the Equity Investment Department, Fixed Income Investment Department, and Pension Management Department, specifically responsible for investment matters. Allowing these professional institutions to invest in the securities market according to strict management regulations is the "entry into the market" for the social security fund.
In addition to the social security fund, there is another "social security fund," officially known as the "Social Insurance Fund." It includes the basic pension insurance fund, basic medical insurance fund, work injury insurance fund, unemployment insurance fund, and maternity insurance fund.
The pension insurance we pay every month goes into the account of the social insurance fund.
Both the social security fund and the social insurance fund are important components of China's social security system; one is a reserve force, and the other is the main force. It's not easy to distinguish between them unless one has specifically studied them.
Fortunately, by the end of December 2016, the National Council for Social Security Fund was entrusted to manage the "Social Insurance Fund." The two funds were managed uniformly but accounted for separately. The investment department of the council also began to invest the "Social Insurance Fund" in the financial market.
By the end of 2023, the scale of this entrusted investment reached 1.9 trillion yuan. Driven by the need for asset appreciation, both the social security fund and the social insurance fund have actively entered the market, becoming increasingly prominent in the capital market.We might wonder, when the social security fund enters the A-share market, which has been hovering around 3000 points for a long time in this magical market, can it really make money?
In fact, its rate of return is much higher than we think.
According to the 2023 annual report of the social security fund, by the end of 2023, the total assets of the social security fund were 3 trillion yuan, and the investment return rate was a positive 0.96%. Since its establishment, the average annual investment return rate of the social security fund has been as high as 7.36%, with a cumulative investment return of 1.68 trillion yuan. It can be said that the social security fund has made a lot of money in the investment field.
Such a stable rate of return has made the social security fund the "smart money" in the capital market.
Even many investors like to check the investment targets of the social security fund because they think this is the pension money managed by the country, and the national team has "inside" information.
Following the purchase may not necessarily make a lot of money, but theoretically, it will not lose money.
Why are foreign pension funds so large?
Back to the original question: Since the investment performance of domestic social security funds is good, why is the total amount of our social security funds so different from that of foreign countries?
In fact, a careful analysis will show that foreign media have played a "word game".
Strictly speaking, the "National Social Security Fund" in China does not include the payment of pensions as a source of funds, because this part of the money is all included in the social insurance fund.The Japanese Government Pension Investment Fund (GPIF), ranked first, is funded by the surplus of Japanese pension contributions and government financial allocations; South Korea's National Pension Service (NPS) is funded by the mandatory social insurance system, with premiums paid by employers and employees. Singapore's Central Provident Fund is a mandatory savings personal pension.
So, if we are to make a comparison, it would be "fair" to combine China's social security fund and social insurance fund for comparison. By the end of 2023, the social security fund's 3.01 trillion yuan, plus the basic pension insurance fund's 2.23 trillion yuan, the total assets exceed 5.24 trillion yuan. At an exchange rate of 1:7, this amounts to 748.6 billion US dollars in assets. In this way, our social security fund becomes the world's fifth-largest pension fund.
So, is the scale of China's pension fund really not as large as Singapore's? This is actually due to different statistical methods, which leads to a fallacy.
Elderly people queuing to receive their pensions.
Despite the large scale of the two social security funds combined, compared to GDP, this scale is still insufficient. From a long-term perspective, China's social security fund faces significant operational pressure if it wants to continue increasing its scale.
As the aging population in the country intensifies, under the pay-as-you-go system, the amount of pension contributions we pay each year has already exceeded the amount of pensions paid out. According to data from Hou Jun, Director of the Asset Management Department of the Ministry of Finance, in 2023, the central finance's subsidy for basic pension insurance was about 1 trillion yuan.
In simple terms, how much "new ammunition" China's social security fund has each year depends entirely on the strength of fiscal subsidies. It is very difficult to have "surplus grain." After all, there are many places where money is needed, and national finance cannot provide unlimited subsidies.
Compared to China's social security fund, other countries' pension funds are fighting a "rich man's war." The most typical example is the world's second-ranked Norwegian "Government Pension Fund."
Since the 1970s, Norway has discovered a large number of oil and gas fields. Over the past few decades, its oil and gas industry has contributed 2 trillion US dollars to Norway's GDP.Considering long-term perspectives, the Norwegian Parliament passed relevant legislation in 1990 to consolidate the country's oil revenues and establish an Oil Fund. This was restructured into the Government Pension Fund in 2006. Oil is like gold, which has endowed Norway's pension fund with a substantial financial foundation.
As of the end of 2023, the size of Norway's sovereign fund is approximately $1.48 trillion, equivalent to each Norwegian citizen owning $270,000. Therefore, compared to China, Norway's pension fund scale is considerably large, truly "relying on heaven for sustenance."
However, without the favor of nature, is it possible to accumulate a large-scale pension fund? Actually, it is possible. We can refer to Japan's pension system for comparison.
China's pension system is primarily based on public pensions with very few private pensions, while the ratio of public to private pensions in Japan is 6:4, making the funding sources more diverse.
The reason is that Japan has vigorously developed enterprise supplementary pension systems and individual savings pension systems in its institutional design. There are also various types of pension funds and contribution systems with a wide range of options.
Japanese people are accustomed to purchasing an enterprise supplementary pension on top of public pensions, and those who are more affluent may also supplement with an individual savings pension.
More importantly, Japan's investment in pensions is very high.
For example, among the three pillars of the Sino-Japanese pension system, Japan's first pillar (public pension) accounts for 45% of GDP, while China's is only 5.8%; in the second pillar (enterprise pension), Japan's GDP share is 17%, while China's is 4.1%, and in the third pillar (private pension), Japan's GDP share is 5%, while China's is 0%.
In addition, although China's social security has achieved full coverage in terms of the system, there is still room for improvement in the number of participants and the contribution base is relatively low. This is the disadvantage of our insufficient pension income.Of course, we are also learning from the pension systems of Japan and Western countries, increasing the proportion of corporate pensions and individual retirement savings, thereby building a more robust pension system.
From the data, it can be seen that Japan's sources of pension funds are not only relatively abundant but also account for a significant portion of GDP. This leads to the fact that although Japan's GDP is not as high as ours, its social security fund size is the largest in the world.
For Japan, this is not necessarily good news.
According to the budget for the fiscal year 2024, one-third of the Japanese government's finances will be allocated to the Japanese social security budget. It can be said that the large scale of Japan's pension funds relies entirely on the strong support of fiscal finances; otherwise, relying solely on the premiums paid by Japan would not be able to manage this huge摊子.
Both stable returns and high earnings are required.
As the bottom-line fund for a country's social security, the pension (social security) fund has different requirements in terms of investment, which can be simply stated as the need for both stable returns and high earnings.
The different national conditions lead to different investment styles, types, and channels for each country's pension (social security) fund.
Let's first look at China's social security fund and what products it invests in.
According to the "National Social Security Fund Domestic Investment Management Measures (Draft for Comments)" released in December 2023, the social security fund can invest in eleven major categories of products and tools in China, including government bonds, stocks, bank certificates of deposit, credit bonds, stock index futures, and other products.
However, for safety considerations, the social security fund has certain investment restrictions - the proportion of government bonds, bank certificates of deposit, local bonds, etc., must not be less than 40%, and bank deposits must not be less than 10%. Equity varieties such as stocks, stock-type pension products, and mixed-type investment funds, etc., must not exceed 40% in total. Therefore, the upper limit is directly capped.Looking at the investment ratio from both domestic and foreign sources, in 2022, foreign investments accounted for 9.77% of total assets, and by the end of 2023, this proportion increased to 11.48%. It is evident that 90% of the social security fund's revenue and appreciation depend on the domestic capital market, but the investment efforts in overseas markets are also intensifying.
Resident Social Security Contributions
Is the situation similar for pension (social security) funds in other countries? Let's take a counterexample.
The Norwegian Government Pension Fund, mentioned earlier, is operated by the Investment Management Department of the Central Bank of Norway. Norwegian law stipulates that the Norwegian Government Pension Fund is only allowed to invest in overseas markets and is not permitted to invest domestically.
Yes, you read that correctly; Norway's pension funds cannot invest in their own domestic assets.
The Central Bank of Norway is quite aggressive. It started by only buying the most conservative bonds and then "let itself go," investing in stocks from various countries, real estate, and stocks and bonds from emerging nations, essentially buying whatever is profitable and whatever is hot.
Currently, 70.9% of all its investments are in stocks, and 27.1% are invested in bonds and fixed-income products. Therefore, the investment returns of the Norwegian pension fund fluctuate significantly. In 2022, the Norwegian pension fund suffered a loss of 14.1%, but in 2023, its fund investment return rate reached as high as 16%, with a floating profit for the year equivalent to 1.5 trillion yuan.
In comparison, the operation of Japan's pension fund is much more conservative.
In 2001, Japan officially established the "Government Pension Investment Fund" to manage the surplus pension funds.
According to the data from the Ministry of Health, Labour and Welfare of Japan, after April 2020, Japan's pension investment fund is benchmarked at 25% each for domestic bonds, foreign bonds, domestic stocks, and foreign stocks, with a small margin of fluctuation allowed, with bonds accounting for more than 50% of the share.By 2022, Japan's pension fund assets amounted to approximately 208 trillion yen, with an annualized return rate of 3.6% since its operation. The return rate is not particularly high, but it is very stable, which is an extreme contrast to Norway.
Of course, due to its substantial capital scale, the absolute return rate is also quite good. Data shows that Japan's pension fund has accumulated a profit of 108.4 trillion yen, equivalent to 5.16 trillion yuan.
Let's finally look at the operation of the Singaporean pension fund mentioned at the beginning.
Singapore's pension system is based on the "Central Provident Fund" system, which is a model of government-led social security and has reference significance for China.
The source of their pension fund comes from mandatory contributions by employers and employees. For each salary, employers contribute 17%, and employees contribute 20%. The ratio will be adjusted according to actual situations.
Because these contributed funds go into individual accounts, not pooled accounts, there is no situation of "young people supporting the elderly," so the enthusiasm of employees to pay is relatively high.
Similar to other countries, Singapore's Central Provident Fund also needs to be preserved and increased in value through investment. The government has established an agency called the "Central Provident Fund Board" to be responsible for this.
Singapore attaches great importance to this and has entrusted the operation to the Government of Singapore Investment Corporation (GIC). GIC has recruited more than 1,700 employees to form 12 departments. These departments not only operate Singapore's Central Provident Fund but also Singapore's sovereign wealth fund. Their investment framework has evolved over decades into a clearer framework.
Firstly, there is the policy portfolio. GIC's main investment targets are the "six core assets," including developed country equities, emerging market country equities, real estate, private equity, fixed income, and inflation-protected bonds. These investment returns are the main source of Singapore's long-term returns.
In order to make more money, GIC has also established an active portfolio, seeking to obtain excess returns by exploring investment opportunities. In terms of return rates, GIC's actual portfolio return rate over the past 20 years has been 4.6% per year.This rate of return is not as high as ours, but it is higher than Japan's and can be described as "steady progress."
How can we learn from the stones of others to polish our own jade?
Looking at the pension funds of various countries, each country has different actual situations. The sources of funds, scale, and investment scope and objectives of pension funds also have their own emphases.
For example, the advantage of the Japanese pension fund lies in its significant fiscal input, with 45% of GDP allocated, which keeps the Japanese pension fund at the forefront of global pension funds for a long time. Therefore, even though its investment scope is conservative, the total returns are still good.
The Norwegian Government Pension Fund is more "unusual." Its source of funds comes from Norway's oil. Perhaps because the money comes too easily, the Norwegian pension fund not only does not allow investment in domestic assets but also aggressively invests in various products globally, turning a national sovereign fund into a "global hot money" feel.
Singapore's pension system also has its merits. Although its design is relatively complex, it adheres to the design philosophy of "saving more when young, and receiving more when old," and it is a mandatory savings system.
"Everyone must save money for their own future pension" is the core essence of Singapore's pension system.
The stones of others may help us polish our own jade.
Whether it is the pension funds of Japan, Singapore, or Norway, their management and investment operation models have received much praise internationally.
These countries have explored decades of experience, which may provide reference and lessons for the healthy and stable operation of China's social security funds against the backdrop of aging and delayed retirement.
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