Reports that the Ministry of Finance last year mishandled nearly 6 billion yuan (US$722 million) in pension funds have shone new light on an old question -- how the safety -- and, if possible, the profitability -- of the nation's insufficient yet still massive social-security funds can be ensured when the relevant government departments become unreliable.

Late last month, the National Audit Office released its report on the use of 2002 budget funds. Among other problems, it exposed the ministry's failure to use the funds "as required.'' This "not only resulted in these funds being left idle on the ministry's bank account but also put additional pressures on the central budget,'' the report said.

The audit report did not go into why the ministry failed to use the funds as required. However, Zheng Binwen -- deputy director of the Institute for Europe under the Chinese Academy of Social Sciences -- said: "It's a matter of corruption. At best, it's about ministry interests.''

At a deeper level, the issue exposed a long-standing blindness to the economic motives of people entrusted with State assets and the lack of an incentive system that would maximize their economic interests while these people fulfil their obligations, said Yi Xianrong, a senior economist with the academy.

The solution is to build such a system, Yi said.

But the issue does not stop there. The ministry's misbehaviour has fuelled more scepticism about stock investments by the National Social Security Foundation Council, the body entrusted by the government to build on the 124 billion yuan (US$15 billion) in assets of the National Social Security Foundation.

"Now the question is who will supervise the council,'' asked Yi.

So far, no irregularities have been found at the council, but the foundation's stock-market performance has continued to provide its critics with ammunition.

A specially authorized 300-million-share placement in the oil conglomerate Sinopec in 2001 resulted in huge losses being reported in the council's 2002 annual report. The foundation's full participation in the stock market began last month. The council and the six fund-management firms handling its stock investments have been criticized for poor performance since then.

Zheng said this is no surprise compared with international experiences. Most of the more than 20 countries that manage their pension funds in ways similar to China have suffered asset shrinkages over the past two decades, he said. "Those are bloody lessons,'' he added.

Economists have recommended that safer investment channels be considered, such as stock index funds and treasury bonds -- both foreign and Chinese -- as well as more reasonable investment approaches such as investing via personal accounts instead of through collective State trading, which can give rise to abuses of power.

But Zheng said that, in the long run, the provisional rules currently enforced should be replaced by a social security law that would regulate all the parties involved. This could hopefully provide relief and assurances that those funds are managed in the best way possible, he said.

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