China’s pay-as-you-go pension system, created in 1995, is on the verge of bankruptcy, largely because of a rapidly aging population (Exhibit 1). At the same time, the country’s one-child-per-household policy is undercutting the traditional family approach to caring for aged parents, leaving the government to care for the elderly. To finance pensions, the government must fill a gap that will come to $15 billion by 2005 and to $110 billion by 2010 (Exhibit 2). Major changes in government policy are needed to meet these obligations and to manage pension assets more professionally. When the reforms come, they will be among the strongest drivers of development in China’s nascent primary and secondary capital markets as well as in fund management, thereby creating sizable opportunities for domestic and foreign securities firms alike.
One way to close the deficit would be to turn state-owned enterprises into publicly traded ones; almost two-thirds of China’s top 500 companies have yet to be listed.1 On current plans, by 2005 equity issues are expected to reach a total of $200 billion, including more than $80 billion from large-capitalization companies. A further substantial source of funding would be the sale of the currently nontradable state-owned...