The Theoretical And Empirical Analysis On Feasibility Of Chinese Pension Funds' Investment In Infrastructure

With the increasing frequency of financial turmoil, the influence of financial crisis on the global pension funds mainly reflected in:Firstly, the decline of market price led to the assets of pension funds shrank seriously. The concept of long-term and rational investment had been paid more attention again, namely the long-term average return, not just the annual profit and loss. Secondly, the rising investment risk reduced the risk preference of pension funds, which made them prefer to the strategy of entrusted investment and passive investment. Thirdly, the consciousness of risk management enhanced. Due to the increasing correlation between various assets, if we simply rely on the historical correlation, we probably make the wrong asset allocation without taking into account the dynamic characteristics of the risks. Therefore, investment risks must be managed dynamically with the risk allocation method. In addition, the aging population in China will expand the financing gap and increase the potential pension liability, which makes it urgent to realize the maintenance and appreciation of pension funds through the long-term, market-oriented, diversified investment. Simultaneously, the accelerating urbanization must inevitably increase the demand of infrastructure services and investment, while the shortage of effective investment highlights the disparity between the infrastructure supply and demand. Consequently, we should actively build a diversified financing platform, innovate the financing tools and create the investment channels for long-term funds, such as pension funds, insurance funds, reserve funds, etc. It just accords with the realistic need of pension funds. Hence, in the era of promoting 'the new industrialization, information, urbanization and agricultural modernization' synchronously, infrastructure as the chief alternative investment will gradually be an effective way for pension funds to reduce risk exposure and obtain benefits.Although foreign pension funds have invest in infrastructure for nearly twenty years and basically form a consensus that infrastructure investment can improve the yield and promote long-term sustainable growth, our pension funds are still in the infancy, and the research mainly focused on qualitative description. What's worse, the dispersed views and single method can not form systematic theory and complete analysis framework. Limited to the data, the empirical test of investment performance is almost a blank. Therefore, this article will view social output as the material basis of pension funds, analyzes the long-term interaction between pension funds, infrastructure and economic growth, and explores the necessity and feasibility of pension funds investment in infrastructure. Starting from the concept definition, based on theory analysis, experience summarization and empirical test, we discuss the investment channel, decision-making evaluation, risk management, driving factors and investment barriers. Meanwhile, in order to guide the practice, we measure the micro and macro economic benefits of pension funds investment ind infrastructure. The contents of this paper are as follows:First of all, based on the macro economic growth model, we analyze the interaction between pension funds, infrastructure and economic growth from the perspective of the capital, labor and total factor productivity. On the one hand, the funded pension plan will increase physical capital accumulation by means of compulsory and voluntary savings, then effectively translate into investment through financial market to improve the efficiency of capital. At the same time, it will affect the long-term economic growth from labor supply and human capital accumulation by influencing the reproductive decisions, eduction decisions and retirement decisions. While the impact on the total factor productivity is mainly manifested in the allocation efficiency of labor and capital as well as the level of income redistribution. On the other hand, infrastructure as one of productive capital will affect labor demand and physical capital accumulation through the investment multiplier effect, then directly promote economic growth. In the meantime, good infrastructure is conducive to improve population quality and increase social welfare. More importantly, infrastructure investment will improve the total factor productivity by industry agglomeration, diffusion and structure effect, environment effect, and so on. Consequently, pension funds directly or indirectly investing in infrastructure will produce positive effect on the three aspects. In return, economic growth will generate positive utility by influencing pension contribution, financial subsidies, investment yield and pension purchasing power. Eventually it will form a virtuous cycle between the government, enterprises and individuals. In addition, based on the data from1989to2012in China, we use the multivariate vector auto regressive (VAR) model and multivariate vector error correction (VEC) model to define the long-term equilibrium and the short-term fluctuation relationship between the pension fund, infrastructure and economic growth. Finally we conclude they have one co-integration relationship, and the pension fund has not been playing a positive role for promoting economic growth. What's worse, there is not a significant granger causality between the pension fund's accumulation, GDP growth and the development of infrastructure in the last20years. Impulse response analysis, however, shows given a positive impact on economic growth and infrastructure will promote the accumulation of pension funds in the long term.Secondly, we explore the necessity and feasibility of pension funds investment in infrastructure and its operating mechanism. First, the necessity is reflected in realizing the synchronous development of pension funds and economic growth, and reducing the inflation erosion on pension assets. Second, the feasibility is embodied in the great challenge fo global infrastructure investing and financing, increasing openness of infrastructure market, the transformation of pension funds'investment concept in post-crisis era, and the remarkable historical performance in pension funds' portfolios. Third, the paper analyzes the deal structure of main investment channels and comparative advantages. Then combined with the life-cycle of infrastructure project and common infrastructure investment index, it elaborates the decision-making process. Fourth, we analyze the risks on the macro, meso and micro levels and their characteristics, then build the risk management processes and propose the corresponding risk management strategy.Thirdly, we summarize the experience of typical pension fund investment in infrastructure and test the feasibility from micro and macro aspects. According to OECD report, this article starts from the overall situation of international pension funds investment in infrastructure, and especially explores the development of infrastructure market, pension funds' investment and operation, the proportion on infrastructure investment and its returns in Canada, Australian and Chile. Subsequently, it illustrates the Netherlands PGGM pension group's investment on Walney offshore wind farm as the specific case. Based on the above analysis, we sum up the principal driving factors and the main barriers for pension funds investment in infrastructure. Next, we examine the economic benefits of Chinese individual account pension funds investment in infrastructure from the micro and macro aspects. On the micro level, we take infrastructure as a separate asset class,and use the conditional value at risk model to optimize the portfolio, eventually obtaining the benchmark of optimal infrastructure allocation is not higher than20%. On the macro level, we take infrastructure as a separate productive factor into the growth model and incorporate pension funds investment in infrastructure into the infrastructure capital stock. Supposing the ratio of individual account pension funds investment in infrastructure is10%,20%,30%, respectively, we predict their contributions to the growth of gross output. Finally, we get the conclusion that the higher proportion, the higher relative GDP growth rate. However, the growth tendency is the fastest growing in2013-2030, relatively slow in2031-2040, almost steady in2041-2050and it begins to decline slightly.In the end, we put forward the new thoughts of Chinese pension funds'future investment in infrastructure and relevant policy recommendations. Combined the current policy, economic and market environment, we broadly take affordable housing and green infrastructure into Chinese pension funds'investment scope. On the one hand, based on the integration of housing security and social security, we think pension funds can enter the housing investment field through the path of "trust loan?debt investment plan?real estate investment trust funds?public private partnership". But taking into account the security, the recent most appropriate way is to adopt trust loans and develop the real estate investment trust funds. On the other hand, in order to realize the green and low carbon economy or sustainable development, we propose pension funds can invest in green infrastructure, such as new energy, environmental governance and climate change through the path fo "green bonds?green industry fund?public private partnership". Finally, we put forward some constructive policy suggestions from the aspects fo pension funds, infrastructure and financial markets to promote Chinese pension funds investment in infrastructure.Through the above exploration and summary, innovations of this paper are mainly reflected in:First, it enriches the research contents of pension funds investment, including the necessity and feasibility of infrastructure investment, investment channels, risk management and so on,and refines the practice experience and lessons of international pension funds investment in infrastructure. Second, it forms the theory framework between pension funds, infrastructure and economic growth, and uses the multivariate vector auto-regressive (VAR) model and multivariate vector error correction (VEC) model to do the empirical research. Third, according to the optimal portfolio CVaR models it acquires the benchmark proportion of China's individual account pension fund investment in the infrastructure, and based on the Solow growth model predicts its tension effect on GDP. Fourth, it explores the new ideas for future pension funds investment in generalized infrastructure, such as affordable housing construction and green infrastructure. Certainly, it is highly innovative and challenging research both at home and abroad. Because of the short history of pension funds investment in infrastructure, many policy restrictions, the lack of literature and data, it is hard to avoid omissions in the theoretical analysis and has some deviations in the empirical test results. In the future, continuous attention and in-depth study are needed to make it more scientific and perfect.