China's social security fund has taken a beating from the domestic media for the performance of its investment choices. But the criticism might be premature as, according to analysts, the fund has made some sound investments that could pay off in the long term. Zhang Shidong reports.

　　China's social security fund has quietly started investing in the country's A-share market in hopes of relieving the under-funded pension system. To date, its foray into the equities market has been dismal, disappointing millions of pensioners nationwide.

　　Analysts, however, say they shouldn't fret as the government's investment approach into the local currency share market has yet to prove a fiasco.

　　On June 10, the social security fund found itself to be one of the buyers of the 60 million A shares floated in a rights offer by Yantai Xinchao Industry Co, a company that trades on the Shanghai stock market. It mainly produces electronic components and textile materials.

　　The purchase caught the attention of investors as it was the first time the fund had bought into stocks since it had hired six fund management firms to manage its investment in the equities market last month.

　　Corporate documents released by Yantai Xinchao Industry showed four out of the six firms subscribed to the sales, purchasing a combined 732,600 shares for 6.23 million yuan (US,000).

　　The purchase was a landmark for China's 124 billion yuan social security fund. It was originally set up in 2000 with the aim of reforming the underfunded pension system and subsidizing laid-off workers.

　　Its mission was to tap the country's two A-share markets in Shanghai and Shenzhen, home to 1,200-plus publicly traded companies with a market capitalization of US billion.

　　However, the debut did not provide fond memories for the fund's managers and the National Council of the Social Security Fund.

　　When the 60 million A shares in Yantai Xinchao hit the market on June 25, its share price dropped 5.9 percent to 8.46 yuan, eking out a 1 percent premium over the offering price of 8.37 yuan.

　　The price fell to a new low of 8.03 yuan three days later, leaving the fund with a loss of more than 200,000 yuan if still holding onto the shares.

　　The share price in Yantai Xinchao closed at 7.71 yuan on Friday, giving the pension fund a possible loss of nearly 480,000 yuan.

　　No public information is available on whether the fund sold the shares.

　　Early this month, the fund continued its play in subscribing to shares issued in rights offer, despite its unsuccessful debut.

　　Penghua Fund Management Co, one of the six fund managers appointed by the social security fund, purchased 496,515 A shares in Minfeng Special Paper Co, a Shanghai-listed paper manufacturer, at 16 yuan each.

　　When the shares in the paper producer hit the market on July 9, the fund took a big pounding as the shares plummeted 7.48 percent to 14.23 yuan at close. The pension fund lost around 880,000 yuan.

　　Share prices in Minfeng Special Paper finished at 13.15 yuan on Friday, already 18 percent off its offering price.

　　The result has led to a frenzy of media interest. Scoffing at the fund's investment strategy, media reports accused the council of not learning any lessons from its initial experience when it bought 300 million initial public offering shares in China Petroleum & Chemical Corp, also known as Sinopec, in July last year.

　　The fund bought the Sinopec IPO at 4.22 yuan. But when the lock-up period expired, the fund found it would see its investment taking a hefty loss if cashing out the stock. The shares had already fallen well below its offering price. Even now, Sinopec's A shares have never returned to its debut level.

　　However, the social security fund council dismissed the criticism saying its strategy does not target quick profit taking.

　　"We do not pay much attention to short-term return. What we are doing is not to seek the price gap from selling and buying shares. What we really emphasize is the growth potential of the company," said Xu Bo, a council spokesman.

　　Whatever the fund council says to defend its investment approach, it has done little to relieve the financial burden caused by China's aging population.

　　According to the State Development Research Center, the State Council think tank, the pension fund had a deficit of 87 billion yuan last year. The shortfall could get even wider in the coming years as the number of elderly rises.

　　At present, China has about 130 million people above 60, making up 10 percent of the total population.

　　However, the number is expected to reach 250 million by 2025, roughly 20 percent of the country's population. It would make the shortfall wider if the pension's investment channel was limited to bank deposits which yield only 1.98 percent annual interest at present.

　　The potential threat prompted the government to give the pension fund access to the A-share market at the end of 2001, allowing up to 40 percent of its assets to be put into the equities market.

　　"In the long run, it would be necessary for the social security fund to participate in the stock market," said Liu Shengjun, a China Euro Inter-national Business School research fellow at the case development center.

　　"In Western countries, such as the US and Britain, the proportion of pension funds in securities reaches about 50 percent," Liu said.

　　But to invest in an emerging market that is fraught with poor corporate governance and clouded transparency among domestically listed firms poses a challenge to the six fund management firms.

　　"The high price-to-earnings ratio, the fiddled financial data and the uncompetitive core business facing the Chinese listed companies are major obstacles the fund will have to overcome," Liu said.

　　Given its nature, the fund is supposed to target companies that report stable profitability and are leading industrial players.

　　When commenting on the strategy of buying into shares issued in the rights offer, it is not a blunder as statistics show it was a play that generated sub-stantial gains last year. In comparison, share prices in the Shanghai and Shenzhen A-share markets slumped about 15 percent.

　　During the period, as many as 29 companies offered additional shares, yielding an average return rate of 54 percent to subscribers.

　　"Historically speaking, the risk-adjusted return on the rights offer is always good business," said analyst Dai Ming of Citic Securities. "The pension fund is adopting a defensive and conservative investment approach which quite underscores the safety of the principals."

　　It is widely expected the pension fund has written agreements with the fund management companies in regards to stringent items on the selection of stocks.

　　The pension fund is believed not to buy stocks which post corporate losses or are suspected of committing wrongdoings. It will also shy away from stocks that have more than doubled its price within the past two years, said industry insiders.

　　Liu said the stocks the pension fund has purchased are too small in number to evaluate its investment strategy.

　　"The sample is still not representative enough to prove anything. It is too early to give comment on the performance of the pension fund," he said.

　　Recently, the pension has rode on the rights offer by Union China Holdings Co, an apparel manufacturer that is listed on the Shenzhen stock market. It bought more than 1.9 million shares for 6.08 yuan each.

　　Shares in Union China Holdings closed at 6.09 yuan on Friday, a price that has already put the pension fund at a meager profit.

　　But it should never be expected that the pension fund will only invest in plays of the rights offer. As the half-year earnings reports released on July 23 show the fund appeared among the top-10 shareholders of the two listed companies that have recorded fast-growing earnings increases.

　　The pension fund bought 1.71 million A shares in Hangzhou Iron & Steel Co, a Shanghai-listed steelmaker that posted 74 percent earnings growth for the first six months of the year.

　　Another is Sichuan Lutianhua Co, a Shenzhen-listed chemical firm in which the fund held on to 336,800 shares. The company said its earnings for the period ending in June rose by 27 percent from the year-earlier period.

　　Although it remains unknown as to whether the pension fund has made money from the investment, both firms should be seen as good buys in terms of their profitability growth.