Dai Xianglong： The income of the social security fund in the first half of the year is not equal to the shrinking of stock assets.

　　As one of the largest institutional investors in China, the national social security fund has attracted much attention from the market. Recently, the Social Security Fund has many new ideas and actions on investment. Focusing on related hot issues, our reporter recently interviewed Dai Xianglong, chairman of the National Social Security Fund Council.

　　China is a developing country, and there is no surplus of funds. However, the channels for converting social funds into capital are too narrow, and the proportion of direct financing should be increased through multiple channels.

　　Reporter: You have served as the leader of commercial banks, central banks and local governments, and now you are in charge of the work of the Social Security Fund Council. It should be said that you have been exposed to the capital market from all angles. The 17th National Congress of the Communist Party of China proposed to optimize the capital market structure and increase the proportion of direct financing through multiple channels. What do you think is the significance of capital market to China’s economic and financial development? What aspects should we focus on to develop and improve the capital market at present?

　　Dai Xianglong: The capital market, also known as the long-term capital market, refers to places where various funds are borrowed and traded for more than one year. In China, the capital market mainly includes national debt market, stock market, medium and long-term corporate bond market and medium and long-term loan market. Developing capital market is of great significance for deepening the reform of financial system and promoting economic and social development. In terms of financing, enterprises can obtain long-term funds for production and construction, and most of these funds become enterprise capital, which improves their own development ability and corporate governance level; In terms of investment, it can preserve and increase the value of funds, generally speaking, it can get a higher return than the interest on bank deposits, which is beneficial for urban and rural residents to convert some deposits into equity and increase property income; In terms of market function, it can guide social funds to invest in regions, industries and enterprises with high efficiency in the use of funds; From the perspective of strengthening the national macro-control ability, it can promote the adaptation of capital supply and credit supply, reduce excess liquidity, reduce dependence on foreign capital, and better promote the balance of payments.

　　After long-term efforts, the reform and development of China’s financial industry has achieved remarkable results, but there are still many outstanding problems to be studied and solved, including the low proportion of direct financing. It has been 15 years since the Third Plenary Session of the 14th CPC Central Committee proposed to increase the proportion of direct financing, but the progress is not obvious enough. From 2001 to 2006, the ratio of stock financing to loan increase in that year was the lowest 2.1% and the highest 9.5%. In 2007, the stock market rose sharply by more than 20%, and this year it will definitely drop sharply. China is a developing country, and there is no capital surplus. Excess liquidity refers to the short-term capital supply exceeding the macro-control capital demand, which leads to the excessive growth of asset prices. At present, there is "excess liquidity" in China. First, because of the imbalance of international payments, foreign exchange reserves occupy too much RMB funds; Second, because of the insufficient capital formation and the rapid growth of credit capacity, the channels for converting social funds into capital are too narrow, and a large amount of funds are converted into credit funds. The unreasonable structure of social funds reduces the utilization rate of social funds. In recent years, to create 100 yuan’s GDP in China, it needs 160 yuan’s money supply, which is more than double that of the United States, and also exceeds that of Japan, which mainly relies on indirect financing.

　　The report of the 17th National Congress of the Communist Party of China proposed to "optimize the capital market structure and increase the proportion of direct financing through multiple channels". In this regard, we should conscientiously implement:

　　First, we should continue to expand stock financing. China’s economy and society have developed steadily, national strength has been continuously improved, market management has been gradually improved, and the stability and development of the stock market have a good foundation. By adjusting the financing rhythm, increasing institutional investment, strengthening system construction and innovating the stability mechanism, China’s stock market will surely develop steadily. At present, we should implement a tight monetary policy, focus on controlling inflation, and at the same time pay attention to the healthy development of the capital market and maintain the stability of the real estate market.

　　The second is to develop bond financing. By the end of June 2008, the total amount of bonds in China had reached 13.74 trillion yuan, but 91.5% were government bonds, policy financial bonds and central bank bills, and corporate and corporate bonds only accounted for 8.5%. It is necessary to speed up the development of enterprise credit rating agencies, improve the bankruptcy settlement mechanism, strengthen the coordination of financial regulatory agencies, and solve the guarantee problem of corporate bond issuance, so that the issuance and transfer of corporate bonds can be greatly developed.

　　The third is to create fund financing. Fund financing includes securities investment funds, venture capital funds and equity investment funds. At present, securities investment funds have been stipulated by law and have developed rapidly; Venture capital fund, which has administrative regulations, is small in scale; Equity investment funds or industrial investment funds are still in the experimental stage of reform and should be boldly and comprehensively promoted.

　　Reporter: In 2006, Tianjin applied to the State Council to set up the OTC market of unlisted public companies. What is the purpose of setting up this market? What role can it play in the whole capital market system?

　　Dai Xianglong: The securities trading market includes the on-site market and the off-site market. OTC market mainly refers to the over-the-counter market (OTC), which provides stock quotation and transfer services for public companies that fail to meet the listing conditions. The establishment of over-the-counter market is conducive to increasing the proportion of direct financing through multiple channels, providing capital for more and wider public companies than listed companies and promoting capital flow; It is conducive to providing capital for small and medium-sized enterprises that do not have listing conditions for the time being and are in the initial stage of development, but have strong growth, and promoting the development of small and medium-sized enterprises and scientific and technological small and medium-sized enterprises; It is beneficial for unlisted public companies to improve the corporate governance structure and provide more high-quality listed companies for the stock market.

　　It has become an established policy in the State Council to create conditions to build an OTC market and form a mechanism for quotation and transfer of shares of unlisted companies under unified supervision. The CPC Central Committee and the State Council have incorporated the development and opening-up of Tianjin Binhai New Area into the national development strategy layout, and the State Council has approved Tianjin Binhai New Area as a national comprehensive reform pilot zone, and made financial reform the focus of reform. On March 13th, 2008, the State Council officially approved the "Overall Plan for the Comprehensive Reform of Tianjin Binhai New Area", proposing that "it is necessary to create conditions for the establishment of a national unlisted public company equity trading market in Tianjin Binhai New Area". It is understood that this reform is being carried out quickly. Shanghai will gradually become an international financial center. Beijing, as the capital of China, is actually the financial decision-making management center of China. Tianjin will build an over-the-counter trading market, and other big cities will play an important role in the regional financial market. China has a vast territory and a growing economic aggregate. Under the unified planning of the state, we should give full play to the role of relevant cities and jointly promote the reform and development of China’s modern financial industry.

　　● The Social Security Fund does not directly invest in a single stock, and there is no so-called insider information source. It independently conducts investment business in accordance with relevant regulations.

　　Reporter: You have always stressed that social security funds should pursue the concepts of long-term investment, value investment and responsible investment. Recently, you also said that the Social Security Fund will do what we should do in the stable development of the stock market. Can you elaborate on the role played by social security funds in the stock market in recent years? Will the social security fund change in the way or proportion of stock investment in the future?

　　Dai Xianglong: On September 25th, 2000, the CPC Central Committee and the State Council announced their decision to establish the National Social Security Fund and set up the National Social Security Fund Council to manage and operate this fund. The National Social Security Fund is a central strategic reserve, which is mainly used to cope with the pressure that pensions can’t cover their expenses during the peak period of China’s aging. The fund comes from the central financial allocation, the income from the reduction of state-owned shares and the transfer of shares, part of the lottery public welfare fund, investment income, etc., and invests in fixed-income products, stocks and industrial investment. The national social security fund has formed a unique investment concept and style: First, it insists on long-term investment. In a long period of time, the state has no major expenditure arrangements for social security funds, and social security funds have always insisted on obtaining stable and high returns through long-term investment. The second is to insist on value investment. Social security fund investment has no so-called inside information, based on the analysis of financial market trends, investing in diversified financial products with high current and potential returns. The third is to insist on responsible investment. The investment decision of social security fund should not only ensure the preservation and appreciation of the fund, but also maintain the stability of financial market and promote the economic development of enterprises and regions. By the end of 2007, the total assets of the national social security fund were more than 500 billion yuan, and the average annual rate of return in the past five years was 10.7%. It is predicted that the total assets will exceed 1 trillion yuan by 2010.

　　Pensions in all countries are an important source of investment in the capital market and an important pillar to stabilize the stock market. There are more than $20 trillion in global pensions, accounting for a quarter of the global capital market. At the end of 2007, the national social insurance assets were 1.5 trillion yuan, the total assets of commercial insurance companies were close to 3 trillion yuan, and the urban and rural savings were 17.6 trillion yuan, and the ability to invest in the capital market was continuously enhanced. The national social security fund has played an important role in the development and stability of the capital market: first, the total investment has been increasing. At the end of 2007, the social security fund invested 485.4 billion yuan in stocks and various financial products with a term of more than one year, accounting for 95% of all assets, including 181.6 billion yuan in domestic and foreign stocks. The second is to insist on long-term investment. Especially when the stock market is depressed, it can show the stabilizing effect of social security fund on the stock market. The third is to promote the standardized operation of the fund industry. So far, we have selected 10 fund management companies as investment managers of the national social security fund to promote the fund management companies to continuously improve their management level. Fourth, the social security fund directly invested in enterprises and invested more than 40 billion yuan in equity investment funds to participate in the management of companies, which promoted the improvement of the governance structure of listed companies. With the strengthening of the national social security fund, we will play a greater role in promoting the development of the capital market.

　　Social security fund has gained some experience in improving investment management. The social security fund will invest in domestic and foreign stocks and some bonds, and implement entrusted management through open market competition for asset management companies. At the same time, the total amount of investment in various financial products shall be controlled in proportion, the proportion of investment in five years and each year shall be defined, the rolling operation shall be carried out, and fine-tuning shall be carried out quarterly within the allowable range. Practice has proved that the above investment management methods are effective. The Social Security Fund does not directly invest in a single stock, and there is no so-called insider information source. It independently conducts investment business in accordance with national laws and regulations and market supervision regulations, and in accordance with the National Social Security Fund Investment Management Regulations formulated by relevant departments in the State Council. Now, due to the stock market downturn, stock investment has been within the internal control ratio. I believe that our investment managers will definitely adhere to the concepts of long-term investment, value investment and responsible investment, and correctly handle the relationship between investment and risk. Doing so can not only maintain the stability of the stock market, but also meet the interests of the social security fund.

　　● The development of equity investment funds is conducive to converting some corporate and individual deposits into capital, reducing international capital inflows and alleviating the pressure of RMB appreciation.

　　Reporter: Under your impetus, China’s first industrial investment fund-Bohai Industrial Fund was established in Tianjin in 2006. In April this year, the State Council approved the National Social Security Fund to invest in industrial funds and equity investment funds; Recently, the Social Security Fund has invested 4 billion yuan in Xiang Ding Hui and Hongyi Funds. So, what role do you think equity investment funds can play in the development of capital market? What problems need to be solved in the current development of equity funds? Next, what are the plans of the social security fund in the investment of equity funds? Are you considering launching new funds and fund management companies with social security funds as the leading factor?

　　Dai Xianglong: Equity investment fund is a combination of capital and wisdom, which has a special function in promoting the development of capital market. The development of equity investment funds is an urgent need for enterprises to expand their capital, for investors to maintain and increase their value, for improving the capital market and for improving macro-financial regulation. As a developing country, China is not well-off in social funds. The current excess liquidity is due to insufficient capital formation, excessive credit capacity and unreasonable social capital structure. The development of equity investment funds is conducive to converting some corporate and individual deposits into capital, reducing international capital inflows and alleviating the pressure of RMB appreciation. At present, the development of equity funds should focus on studying and solving the following problems:

　　First, speed up the pilot reform. As early as 1997, the central government requested the formulation of industrial investment funds. Over the years, relevant departments have done a lot of work, but overall, the progress is slow. The industrial investment fund pilot working group led by the National Development and Reform Commission has been established for more than eight months, and the relevant work is progressing smoothly. We hope that the pilot working group will report the "Overall Plan for Industrial Investment Fund Pilot" as soon as possible, strengthen the guidance for the pilot work, and speed up the approval of relevant funds.

　　Second, measures for the management of equity investment funds should be introduced as soon as possible. The registration, management, transaction and taxation of equity funds shall be stipulated according to law, the supervision system shall be improved, and favorable conditions shall be provided for the development of equity funds in terms of investment and withdrawal. There are many administrative departments in China. Due to historical reasons and different angles, the same noun with the same basic attribute has different expressions in different departments, which often affects the promotion of related work. The operating principles of industrial investment funds and equity investment funds are basically the same, and equity investment funds are often referred to as private equity investment funds. Therefore, I suggest that industrial investment funds and private equity investment funds can be collectively referred to as "equity investment funds" in China at present, and corresponding management regulations or measures should be formulated as soon as possible. In terms of the establishment method of equity investment funds, the requirements for the establishment of corporate system, trust system and partnership system and the tax system are stipulated according to law, which are independently selected by investors.

　　Third, actively cultivate fund management professionals. At present, the development of equity investment funds is not a lack of money, but a lack of excellent management talents. It is necessary to speed up the training of senior talents in fund management, and appropriately set up Sino-foreign joint ventures or wholly foreign-owned equity investment fund management companies.

　　The National Social Security Fund will sum up the past experience of participating in launching a number of industrial investment funds, apply the policy that the State Council has given us that the total investment in equity investment funds can reach 10% of the total capital, and give full play to the role of social security funds in promoting equity investment funds. We will formulate measures for the management of social security funds investing in equity funds, select and hire fund management teams in an open, fair and equitable manner, and focus on investing in growing small and medium-sized enterprises. If the market needs it, we will consider setting up a new equity investment fund and its management company led by the National Social Security Fund, and compete reasonably with its peers in business development according to law.

　　● In the face of large fluctuations in the stock market, the social security fund will continue to adhere to the original investment philosophy and investment management methods, and stabilize the proportion of investment in stocks.

　　Reporter: In the past five years, the rate of return of the national social security fund was much higher than the inflation rate in the same period, achieving the goal of maintaining and increasing value. Especially in 2007, due to the proper investment strategy and the sharp rise of the stock market, the social security fund has realized income of 108.4 billion yuan. Judging from the situation this year, the performance of the stock market is not satisfactory. Can the social security fund continue to achieve better returns and what adjustments will be made in its investment strategy?

　　Dai Xianglong: Due to the changes in the financial market and investment structure, the investment returns of pension funds around the world fluctuate every year. Since last year, due to the global stock market decline, the return on pension investment in various countries has generally declined, and many funds have also suffered large losses. In 2007, the social security fund achieved a high income, but it can not be simply regarded as a one-year income, but the result of the long-term asset allocation of the social security fund during 2003-2006, and the result of the long-term investment goal of the social security fund. According to the minimum risk control requirement that the social security fund will not lose money on average for five years, the high income in 2007 will also bear the market risks and investment losses this year and in the future.

　　On June 30th, 2008, the stock markets of Shanghai Stock Exchange and Shenzhen Stock Exchange dropped by 48% and 45% respectively compared with the end of last year. This year is the first year that the Social Security Fund will implement the new Accounting Standards for Business Enterprises. Changes in the market value of trading products should be included in profit and loss accounting. The social security fund invests in stocks according to the prescribed proportion, and the decline in the market value of the stocks it holds is much lower than that of the Shanghai Composite Index in the same period. Nevertheless, the realized income of the social security fund in the first half of the year can’t offset the shrinkage of stock assets in the first half of the year, and the annual operating income of the social security fund is facing serious challenges.

　　To analyze and evaluate the investment performance of social security funds depends on the long-term results, and the fluctuation of short-term performance cannot and should not be used as the basis for evaluating the investment performance of social security funds. In the face of large fluctuations in the stock market, the social security fund will continue to adhere to the original investment philosophy and investment management methods, continue to adhere to the requirements of the established strategic asset allocation and annual tactical asset allocation, and the proportion of large-scale asset allocation will not change much. We will stabilize the proportion of investment in stocks, increase investment in fixed-income products, increase investment in direct investment in enterprises and equity investment funds, enhance the resilience of trading products, withstand the pressure of market fluctuations, and lay a good foundation for better investment returns in the next year. (Reporter Shi Mingshen Tian Junrong Xu Zhifeng)

Editor: Zhang Renhe