Currently, all newly listed SOEs, along with 75 percent of established stocks, have already completed this transfer to the SSF. This new source of revenue means that the national social security fund will increase its earnings by 30 billion yuan every year.

However, because all state-owned enterprises have been permitted to offer shares on the stock market since 2004, there are less and less state-owned shares to be transferred to the SSF. "There are not so many state-owned shares now. We can only rely on gaining dividends," an anonymous official with the National Council of SSF said.

But as many SOEs rely on the monopolization of industrial resources in order to gain their profits, some experts argue that all of these companies should also transfer part of their revenue to the SSF.

Difficulties with Transferring Shares

Transfers of state-owned shares to the SSF seem promising, but they are not as simple as they sound.

On June 19, 2009, four ministries, including the Ministry of Finance, released a notice requiring a 10 percent stake (as a proportion of the shares released during the initial public offering) of all SOE holdings to be transferred to the SSF. SOEs that have sold their state-owned shares or have state-owned shares that amount less than 10 percent, will have to deposit cash in the SSF.

The new policy divides SOEs into two categories. The first category comprises of SOEs who were listed on the A-share market after June of last year, while the second category contains SOEs listed before June of last year.

The EO learned from the National Social Security Fund Council that newly listed SOEs have all finished transferring their 6.604 billion state-owned shares, which account for a total market value of 63.83 billion yuan. Additionally, of the 8.656 billion shares expected from SOEs established before June 2009, 6.45 billion have already been transferred to the SSF. They account for 75 percent of total shares expected from established SOEs and 80 percent of the entire market value of 63.83 billion yuan transferred to the SSF from SOEs.

The first newly listed SOE to transfer state-owned shares was Sichuan Expressway Company, Ltd. The company transferred 50 million state-owned shares to the SSF.

The China State Construction Engineering Corporation, which was just listed on the Shanghai Stock Exchange in August, has issued a total 12 billion shares, among which, 1.2 billion have been transferred to the SSF.

By November 11, 2009, 23 newly listed SOEs had transferred 1.71 billion shares, which were worth 90.2 billion yuan, to the SSF.

However, it is not easy to get SOEs that were listed before June 2009 to transfer their state-owned shares to the SSF. The 131 SOEs in this category include the Bank of China, Air China, Industrial and Commercial Bank of China, Guangzhou-Shenzhen Railway, China Life, CITIC Bank, China COSCO and others. Each must transfer at least 100 million state-owned shares to the SSF.

"It's easy to get newly listed companies to transfer the shares. It's just a necessary step for them to get listed. But it's too difficult to have those companies that got listed long before to transfer the shares,"an anonymous source close to the National SSF Council said. Some liken the process to begging.

"Because all the shares to be transferred to the SSF are free, established SOEs are reluctant. Accomplishing this task will be quite difficult," the above source said. He went on to say that things were complicated with these SOEs. Some have had their share structure fundamentally changed; some have sold their state-owned shares. Additionally, the State-owned Asset Supervision and Administration Commission (SASAC) and its local subsidiaries also have a say in the share transfer. They tend to impede the transfers, offering excuses for delayed transfers.

The SSF has no administrative power. That is why it is difficult for it to enforce the transfer of shares from SOEs established before 2009. This is even more difficult if those SOEs have already sold the shares because "that means they have to pay us a huge amount of money," explained the aforementioned source.

In spite of these difficulties, most of the SOEs have already given state-owned shares to the SSF, leaving only 2.2 billion shares to be transferred. These transferred shares have become one of the main sources of income for the fund.

Statistics show that since the establishment of the National Social Security Fund, it has accumulated revenue of 191.5 billion yuan through dividends of state-owned shares or from proceeds from selling such shares.

Social Security Fund Shortfalls

The original goals of these transfers to the SSF included reducing the fund's deficit and establishing a steady source of income.

The National Social Security Fund Council is a ministerial agent that was established in September 2000. It is responsible for operating the social security fund for an aging China from 2020 to 2035. Its first Chairman, Xiang Huaicheng, defined the SSF as a strategic investor and identified its task as maintaining and raising the value of the SSF. SSF assets amounted to 80.50 billion yuan in 2001, among which, 76.52 billion yuan was transferred from China's fiscal revenue. By the end of 2009, the total amount of the fund had reached 776.62 billion yuan.

Income sources of the SSF include income transferred from fiscal revenue, dividends from state-owned shares and revenue from selling state-owned shares, central subsidies for pension funds, lottery revenues and operational income. Fiscal revenue is the largest source of income for the SSF. It has contributed to 380.25 billion yuan in the past decade, accounting for 49 percent of SSF assets. Cumulative investment income was 244.85 billion yuan, with an average annual investment rate of return of 9.75 percent.

The State Council tried to transfer state-owned shares of SOEs to the SSF as early as 2001. The original plan was to allow all the SOEs to trade their state-owned shares on the stock market immediately and require a donation of 10 percent of their IPO shares to the SSF. However, this policy was halted after four months because the flood of new shares caused A-shares to plummet almost instantly.

Concerned with the huge capital shortage of the SSF, the State Council re-instated the stock market reform in 2004. Now, each SOE has to wait a certain period of time before it is allowed to have its state-owned shares trade on the stock market, thus avoiding causing tremendous turbulence to the market.

Local social security funds contributed by individuals and their employers, which are co-managed by the Ministry of Human Resources and local social security departments, have been suffering from severe deficits incurred in recent years.

For example, in 2009, the Shanghai pension fund gained 61.87 billion yuan in revenue, but incurred expenses of 71.05 billion yuan, making the total fund's deficit 9.18 billion yuan. The deficit of the entire social security fund was even bigger, reaching somewhere between 23 billion yuan to 25 billion yuan and accounting for 17 percent to 18 percent of Shanghai’s fiscal revenue. Similar shortfalls are revealed almost every year.

The establishment of the Social Security Fund Council was meant to make preparations for expenditure increases in the future. The fund will not be used to make up for the deficits of local social security accounts. The problem is, China's social security fund is currently worth only 700 billion yuan, while demand for the fund will amount to at least three trillion yuan over the coming decade.

Increasing the Scale of State-Owned Shares Transfers

"It's impossible for the transfer of state-owned shares to make up for the deficit of the SSF. The shares are only worth a few dozen billion yuan. That's far from enough," a source with the National SSF Council said.

Dai Xianglong, the incumbent Chairman of the National Social Security Fund Council once explained to the media that it is a complicated job to calculate the deficit of the SSF because it is constantly affected by fluctuations in the number of employees, the amount of social security payments, salaries, life spans, retirement ages, etc. As estimated by the World Bank, the deficit will be between three and nine trillion yuan. If all of China's migrant workers are to be covered by the social security system, the deficit will be even greater.

The goal of the National Social Security Fund Council is to expand the scale of the SSF to somewhere between 1.5 trillion yuan and two trillion yuan by the end of the 12th Five-Year Plan period, with investment returns greatly exceeding the inflation rate. 

At the present time, there have been no government documents issued or speeches made that address the SSF Council's proposed increase in the fund. However, the fund's deficit of several trillion yuan stresses the gravity of the situation.

"The huge deficit of the social security fund is surely to be the largest threat to China's financial system," senior economist with the National Information Center, Liang Youcai, said. She went on to say that China had to inject more long-term, steady sources of income to the social security fund.

Many experts argue that all the listed companies should bear the responsibility of transferring part of their profits to the social security fund. Some even claim that most of the dividends gained by SOEs should be given to the SSF.

However, the main problem is that most of the big SOEs have already been listed on the A-share market, so there are not many state-owned shares to be transferred. "Some military enterprises don't want to get listed. Others, while willing to be listed, will give up the idea because they are afraid part of their shares will be transferred," an official with the SSF foundation said.

"China's social security fund shortfalls cannot be solved by a central council. That's far from enough," Zuo Xuejin, deputy dean of the Shanghai Academy of Social Science, said. He went on to say that the local social security system should be reformed and that local governments must develop a sustainable local fund system.

This article was edited by Leslie Walczack and Ruoji Tang