Should security fund buy locked shares?

Li Daokui, an economist with Tsinghua University, revealed at a recent meeting that he submitted a suggestion to the State Council that the country's social security fund buy previously locked shares of China's listed companies. The shares are the legacy of the 2005 share-merger reform and the bulk of them will be able to float after the lock-up period ends this year and next. They heavily impact the stock market since investors fear there may not be enough liquidity in the market to absorb the flood of to-be-floated shares. Li said he was optimistic his suggestion would be accepted. His remarks, however, aroused controversy in China.

Li said that since the 500 billion yuan social security fund managed by the National Council for Social Security Fund needs to be expanded, some of the locked shares of listed State companies, should be transferred to the council at an agreed price with a requirement for the council to hold the shares for several years until the capital market is strong enough to sustain floating them.

Is Li's suggestion workable?

Yes

Huang Xiangyuan, independent commentator:

The social security fund is not specifically for safeguarding the stability of the stock market, but that does not mean that it should not buy the locked shares. Dai Xianglong, head of the National Council for the Social Security Fund, said in June 2008 that the council would do what it could to help stabilize the stock market. The council has long planned to increase the proportion of the fund invested in the stock market from 10 percent to 15 percent.

The council manages the fund on behalf of all Chinese, so obviously the public has a stake in how the money is invested.

Li's suggestion is a good way to expand the social security fund. Listed companies were once required to transfer 10 percent of their incomes from selling locked shares to the social security fund. But the policy is yet to be realized. The social security fund plays the role of long-term strategic investor. Even if it sells some of the transferred shares it will reinvest the money in the domestic stock market, helping stabilize it.

Zheng Bingwen, researcher with the Chinese Academy of Social Sciences:

It is a common practice for social security funds to use the capital market to maintain and expand their values. Social security funds are all closely related with the capital market. In the US and European economies social security funds are an important force in the stock market.

In China social security investment has a good record. The Chinese stock market experienced highs and lows over the past five years but the fund achieved an average annual return rate of 26 percent.

No

Ye Tan, economics and finance commentator:

It is unbelievable for Li to make such a suggestion. Both the State-owned Assets Supervision and Administration Commission (SASAC), which owns and manages more than 140 major State enterprises, many of which are listed, and the National Council for Social Security Fund are quasi-government agencies. If the social security fund council can be required to hold the shares after they are transferred, as Li has suggested, then the SASAC can also be required to hold shares.

So it is unnecessary to transfer the shares.

In essence transferring the shares to the social security fund council from the SASAC is like transferring them from the left hand of the government to the right. The only difference is the freezing period would be prolonged. But extending the freezing period may do little to assuage investors' fears since the shares must be floated some time.

Cao Zhongming, independent commentator:

The social security fund should shoulder the responsibility of ensuring stable investment returns for the people and should not incur serious losses from its investments. Transferring locked shares to the social security fund council would subject the fund to a good deal of risk and go against its principle of "cautious investment".

Statistics show that in 2009 the value of locked shares would exceed 4 trillion yuan if the average share price of listed companies was 6 yuan. The national social security fund's total assets are less than 1 trillion. It is not realistic for the fund to buy the locked shares.

(China Daily 02/09/2009 page2)