International investors take advantage of China’s pension market

In China, people’s savings are still dominated by cash and real estate © Jade Gao/AFP/Getty

As China’s age profile continues its rapid reversal, the need for more private pensions is attracting some of the biggest asset managers to the world’s most populous nation.

According to a 2020 study by BlackRock and the People’s Bank of China. Only Rmb 2.2 billion ($330 billion) had been invested in it, he found, pointing to the relatively small amount of savings in the country’s private pension system.

But this year has brought the clearest signs that this is changing.

In April, Chinese authorities unveiled long-awaited measures – including tax incentives – that pave the way for greater development of individual private pensions in a country where savings are still dominated by cash and real estate. .

This change is not only a crucial part of China’s approach to the demographic challenges of its aging population, but also an opportunity for some of the world’s largest asset managers, given its expected impact on the development of the country’s capital markets.

“For BlackRock, that’s definitely the core of why we’re here,” Susan Chan, deputy director of Asia-Pacific and head of Greater China, says of the country’s pension developments. She points out that China does not currently have a “culture of long-term investment”.

Like many of its peers, the world’s largest asset manager has in recent years received approval for a joint venture with China Construction Bank, as well as the green light for a wholly-owned mutual fund business. .

In April – the same month that China introduced its reforms – this joint venture launched its first pilot retirement wealth management product.

The study co-authored by BlackRock reflects the extent to which Chinese policymakers rely on foreign examples and collaborate with international companies. It grew out of a forum in China in 2019 attended by Larry Fink, the chief executive of BlackRock, and senior officials including Liu He, one of President Xi Jinping’s most important economic advisers.

Other international companies that have recently won approvals in China – where capital controls still strictly determine money flowing in and out of the country – include Goldman Sachs Asset Management, which in 2021 partnered with the largest bank. China, ICBC, for a wealth management joint venture. , and Amundi, Europe’s largest asset manager, which has partnered with Bank of China.

Pension reform in China is now a political imperative given the changing demographics. Lauren Johnston, a visiting lecturer at the School of Economics and Public Policy at the University of Adelaide, says the country’s population profile has changed rapidly.

“There really weren’t a lot of older people until recently, and they were almost all taken care of within the family,” she says. “Now you’ve had a dramatic reversal of the age pyramid.”

An old man balances on roller skates

Like its demographics, China’s capital markets have also changed rapidly . . . © Wang Zhao/AFP/Getty

An elderly man is exercising in a park

. . . but remain underdeveloped compared to examples in the United States and Western Europe. © Wang Zhao/AFP/Getty

She adds that the development of a private pension system could encourage greater consumption by the elderly – and the government can also hope that it will have the ability to “cross-subsidize” the existing public pension system.

However, the measures announced in April, while significant, point to a gradual approach to pension reforms. Employees will only be able to contribute Rmb 12,000 ($1,860) per year to private pension schemes, which the government will adjust according to “economic development”.

Like its demographics, China’s capital markets have also changed rapidly but are still underdeveloped compared to those of the United States and Western Europe. BlackRock’s Chan notes that Chinese markets have very few long-term fixed income instruments, for example.

“If you have a population that lives over 80 years and you have instruments that allow you to trade for five years, your ability to capture what is happening in 50 years is much more difficult,” she explains. .

“We think China is going to move forward quite aggressively with this third-pillar private pension scheme, simply because they need it,” says Peter Alexander, managing director of Z-Ben Advisors, a consultancy firm. of Shanghai Council. “You have savers who don’t necessarily have the savings pool to meet their long-term needs.”

But he adds that while he thinks the pensions market is a “really big deal”, he is “less optimistic” that the opportunity will fall to foreign rather than domestic players. Alexander suggests the benefits of other reforms, including second-pillar pensions that work in the workplace, have gone to Chinese providers.

Foreign groups have also had to deal with geopolitical tensions and a series of operational difficulties to compete in China.

These have included draconian lockdowns to limit the Omicron variant of the coronavirus, an economic downturn linked to these lockdown measures, as well as a liquidity crisis in the real estate sector. Property rental company Airbnb was forced to largely abandon its China operations last month.

But foreign actors are betting that deep and widely anticipated structural changes — the kind that have transformed other nations — will survive such challenges.

The study co-authored by BlackRock includes a section on “international experience” which analyzes pension systems in Australia, Canada, Chile, Japan, the United Kingdom and the United States. He notes that the US Congress introduced support for third-pillar pensions in 1974.

“You still have a country that doesn’t rely on its capital market systems to create wealth,” Chan says. “For us, all roads lead to it”.