Largest Korea Fund to Seek More Investment Quota in China

South Korea's National Pension Service Chairman Jun Kwang Woo
Jun Kwang Woo, chairman of South Korea's National Pension Service. Photographer: SeongJoon Cho/Bloomberg

South Korea’s National Pension Service, the country’s biggest investor, plans to seek approval to buy more yuan-denominated Chinese stocks after using up the initial quota of $100 million it received in March.

The $316 billion pension fund plans to use that allotment by September and will pick two managers “soon” to handle the investments, Chairman Jun Kwang Woo said in an interview in Seoul yesterday. The fund also aims to expand investments to Chinese bonds and so-called alternative investments later, he said, without being more specific.

“Given the size of our portfolio and the size of the first tranche, I think it’s natural to increase the quota down the road,” Jun, 63, said, without detailing how much more quota the fund plans to apply for. “I do expect some bumps in the road to further growth. But that doesn’t give an excuse to understate the true potential of the economy.”

Jun’s comments come as data show China’s economy, the world’s second largest, is slowing and as the nation’s stocks get cheaper. The benchmark Shanghai Composite Index has fallen 61 percent from its October 2007 record and traded for 12.7 times reported earnings as of yesterday, or 61 percent below the average level of 32.4 since 1997. The gauge slipped 0.8 percent as of 10:35 a.m. Shanghai time.

China said on May 12 it will cut the amount of cash that banks must set aside as reserves for the third time in six months after data showed that industrial production grew the least since 2009 in April and new yuan loans missed estimates. International interest in yuan-denominated assets is rising as China’s economy expands and its government accelerates the opening of its capital markets.

Qualified Investors

Foreign institutions must get a license as a qualified foreign institutional investor from the China Securities Regulatory Commission first before they obtain quota from the State Administration of Foreign Exchange to buy yuan-denominated stocks and bonds. The CSRC has increased the quotas for QFII to $80 billion from $30 billion, according to a statement in April. China had approved a combined $26 billion of investment quotas for 141 QFIIs as of May 8.

The Bank of Korea, the nation’s central bank, said in March it received permission to invest $300 million in China, while Korea Investment Corp., the sovereign wealth fund, said the same month it was granted a quota of $200 million.

China may set up a new mechanism for foreign pension funds to invest in the country’s capital markets, the Wall Street Journal reported today, citing unidentified people familiar with the matter. The program would be separate from QFII, and Taiwan, Hong Kong and Singapore pension funds without QFII licenses may be among the first to be included in the new program, the report said.

Industrial Production

The Shanghai Composite Index was the worst performer among the world’s 10 biggest markets in 2010 and 2011, tumbling a combined 33 percent, as the central bank increased interest rates and lenders’ reserve ratios to tame inflation. China’s growth rate slowed to 8.1 percent in the first quarter, the slowest pace in almost three years.

China’s industrial output increased 9.3 percent in April from a year earlier, the biggest negative surprise against forecasts in two years, data compiled by Bloomberg show. Local-currency loans of 681.8 billion yuan ($108 billion) last month compared with the median economist estimate of 780 billion yuan.

Banks from Citigroup Inc. to UBS AG cut their economic growth forecasts after the data. Citigroup projects second-quarter expansion of 7.5 percent, down from a prior target of 7.9 percent, according to a research note yesterday.

‘Enormous Potential’

A more moderate rate of economic growth is “desirable from a long-term perspective,” National Pension’s Jun said. “The country has enormous potential.”

China’s longest bear market since 2005 is ending amid government efforts to bolster the economy, strategists at Morgan Stanley Huaxin Securities and Guotai Junan Securities Co. said last month. Their buy recommendations two years ago preceded a 34 percent gain in the Shanghai Composite Index. Banks’ reserve ratios will fall 50 basis points, effective May 18, the People’s Bank of China said on its website on May 12.

National Pension plans to focus more on Asian markets, where economic growth is likely to outpace the rest of the world, Jun said. It aims to open an office in a “key location” in Asia, adding to one in New York and another to open in London next month.

New Office

National Pension forecast its assets to increase to 565 trillion won ($490 billion) by 2016, according to a government statement on June 3. The fund is seeking to boost overseas investments to at least 20 percent by 2016, from about 15 percent in March, to diversify its assets. National Pension had 64.5 percent of assets in domestic bonds and 17.8 percent in local stocks as of end of 2011, it said.

The fund was set up in 1988 to manage pensions for private-sector employees and the self-employed. It is overseen by the nation’s Ministry of Health and Welfare.

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