In a long expected move, China's social security fund has finally cleared all the hurdles necessary to allow it to invest overseas.

The National Council for the Social Security Fund opened an account on the Hong Kong stock exchange's clearing system on Monday, a move that indicates the pension fund can now invest in offshore stock markets.

The fund provides pensions to retired people, who pay a portion of their salaries into it while they are working.

"The opening-up of the account shows that the pension fund has got all the necessary approvals from the government, paving the way for them to make investments on the Hong Kong stock market," said Zhao Xijun, a finance professor at Renmin University of China.

"Legally speaking, it can invest in the Hong Kong stock market immediately, but when it will make that first move depends on market conditions," said an official from the pension fund, who requested to remain anonymous.

"It's the first major step for us (in terms of our overseas investment scheme)," the official added.

The massive welfare fund has long been seeking to expand its investment options, in a bid to raise returns and diversify its portfolio.

Currently, the pension fund mainly invests in bank deposits, domestic bonds, funds and stocks.

The welfare fund has also expanded, gradually, into other areas.

For example, it invested 10 billion yuan (US$1.24 billion) in the Bank of Communications Ltd, the country's fifth-largest lender in 2004, becoming its third largest shareholder.

And it bought a 3.9 percent stake in Bank of China, the nation's second-biggest lender, for 10 billion yuan (US$1.24 billion) earlier this month.

It is reported that the pension fund is in talks with China's largest lender, the Industrial and Commercial Bank of China (ICBC), to invest up to 10 billion yuan (US$1.24 billion).

The welfare fund has also been involved in infrastructure projects, agreeing last year to invest 3 billion yuan (US$307 million) in the Ministry of Railways in the form of a trust investment.

The Corporate Investor Participant (IP) Account that the welfare fund opened on Monday in Hong Kong will enable the State-run pension fund to hold State-owned shares and Hong Kong-traded shares, according to Hong Kong rules.

State shareholders of overseas-listed Chinese companies are required to contribute 10 percent of the proceeds from stock sales to the social security fund, according a rule issued by State Council, China's cabinet.

Whether the much-anticipated offshore investment will turn out to be a boon or a bane to the pension fund is largely dependant on how the pension fund manages risk, experts say.

"Allowing the welfare fund to invest overseas could enable it to diversity its investment portfolio and therefore help spread risk," said Zhao, the finance professor.

"Moving into the overseas market, however, also poses challenges for a pension fund manager, as the risks will also increase," the professor added.

The social security fund, set up in 2000, currently has 207.9 billion yuan (US$25.9 billion) of assets under its management.

(China Daily March 22, 2006)