China needs sovereign pension fund -govt scholar

By Charlie Zhu and David Lin

SUZHOU, China, Feb 28 (Reuters) - China needs to set up a new pension fund to put the country's surging foreign exchange reserves to better use and to deflect criticism over its sovereign wealth fund, a Chinese pension fund expert said on Thursday.

Zheng Bingwen of the Chinese Academy of Social Sciences, the government's top think-tank, said China should launch a fund similar to Norway's Government Pension Fund -- Global, which is one of the world's biggest pension funds and invests Norway's oil and gas revenues for future generations.

The fund, which could have initial capital of $200 billion, could help China to beef up its underfunded pension system and achieve better returns on its $1.53 trillion foreign exchange reserves, he said.

It would also help to address mounting Western scepticism over state-owned sovereign funds, including China Investment Corp (CIC), Zheng told reporters on the sidelines of a pension fund forum in Suzhou, near Shanghai.

"CIC has sparked a new round of the China investment threat theory and a new wave of financial protectionism. We may hear fewer of those kinds of voices if we set up a sovereign pension fund to make investments in developed countries," Zheng said.

"People in Western countries regard state-owned sovereign wealth funds as an alien or a monster. But if you make it a pension fund, it would look like an angel," he said.

For a start, Zheng said, such a fund would come under the supervisory gaze of Western pension fund regulators. Sovereign wealth funds, by contrast, breed suspicion because they are unregulated.

GO ABROAD

The $200 billion CIC has spent several billion dollars investing in overseas financial institutions, including U.S. private equity firm Blackstone Group (BX.N) and Wall Street bank Morgan Stanley (MS.N).

CIC General Manager Gao Xiqing said on Thursday that his fund was hiring foreign fund managers to invest in hedge funds and private equity as well as in traditional assets such as bonds and shares. [ID:nSHA107223]

Some Western critics fear state-owned sovereign funds will not invest for commercial returns but for political purposes, building up stakes in leading companies that will give them influence in politically sensitive sectors.

Zheng said the sovereign pension fund he is proposing should adopt a more conservative, longer-term investment strategy than that of CIC and should concentrate on the United States and developed European markets.

CIC and the mooted sovereign pension fund could collaborate on overseas investments if necessary, he added.

The existing China National Social Security Fund (NSSF), a "fund of last resort" for China's patchwork of chronically underfunded provincial pension schemes, should also boost its overseas investments with a focus on markets in neighbouring countries, he said.

The NSSF had assets of 516.2 billion yuan ($72.53 billion) at the end of last year, including overseas equities investments of $1.66 billion, data released at the forum on Thursday showed.

Unlike CIC, whose initial $200 billion came from the central bank's currency reserves, NSSF's funds come from China's Finance Ministry, lottery proceeds and the sale of state-held shares in overseas-listed Chinese firms. ($1=7.117 Yuan) (Editing by Alan Wheatley and Edmund Klamann)