“Chinese population is just coming up to 1.4 billion and it will peak actually very soon within the next decade and then have a long slow decline.”
Stuart Leckie advises on investments and pensions in the Far East. He is the author of books titled "Investment Funds in China" and "Pension Funds in China". He is the Founding Chairman of the Hong Kong Retirement Schemes Association and was Chairman of the CFA Institute Advisory Council on Standards and Financial Market Integrity.
Hong Kong adopted the Mandatory Provident Fund in the 1990s that required residents to put money away monthly towards a retirement savings account. The Hong Kong Retirement Schemes Association was created to address many of the questions surrounding the new program and offer guidance and expertise.
Hong Kong’s retirement plan stands in contrast to a much more complicated Chinese pension fund. China has two separate plans: one for urban residents and one for rural. Glaring problems exist in its current construction and face problems with its growing population in urban areas. “what's going to happen is that the cash requirements to pay out the pension benefits in future, is going to increase and become a very serious burden once the numbers of employed people in China greatly expand.
LISTEN AND SUBSCRIBE
SPEAKER
Stuart Leckie
Founding Chairman
Hong Kong Retirement Schemes Association
MODERATOR
Anthony Scaramucci
Founder & Managing Partner
SkyBridge
EPISODE TRANSCRIPT
Rachel Pether: (00:07)
Hi, everyone. Welcome back to SALT Talks. I'm Rachel Pether. I'm a senior advisor to SkyBridge capital, which is a global alternative investments firm, as well as being the emcee for SAlT, which is a thought leadership platform and networking forum that encompasses, finance, technology and politics. SALT Talks is a series of digital interviews with the world's foremost investors, creators and thinkers. And what we're really trying to do with the SALT talks is aim to empower big, important ideas and provide our audience a window into the minds of subject matter experts just as we do at our SALT event series. Today we're very excited to welcome Stuart Leckie to SALT talks. Stewart is the founding chairman of the Hong Kong retirement schemes association and was chairman of the CFA Institute advisory council on standards and financial markets integrity.
Rachel Pether: (01:00)
He now advises on investments and pensions in the far East and has advised the Chinese government on pension reforms. He was the director of the exchange fund investment limited, which created the Hong Kong governments tracker fund, which was the first ETF in Asia. Stuart is the author of two books, Investment Funds and China and Pension Funds and China. If that's not enough, he was appointed justice of the peace by the Hong Kong government and has been awarded an order of the British empire by the British government. Stuart, you're the first OBE that I've ever interviewed so welcome to today's show.
Stuart Leckie: (01:36)
Thank you very much for, Rachel.
Rachel Pether: (01:38)
I had the pleasure of meeting you in Singapore a few years ago now, and your knowledge of Hong Kong and the wider Asia region was certainly impressive, but maybe before we dive deeper into Hong Kong, tell me a bit about the journey that took you there in the first place.
Stuart Leckie: (01:54)
Yes. I was born and brought up in Scotland and my degree was mathematics, pure mathematics. I decided to train as an actuary. So I did that. Qualified as a fellow of the Institute of actuaries and then worked in insurance in the UK for a number of years, I got something called a Churchill fellowship, and that enabled me to go to US and Canada and I saw a little bit of the international dimension. After that, I was asked to go to Hong Kong to establish an office, a pension consulting office. And the expectation was that I'd be in Hong Kong for two years. Well, the first two years, it was very tough because I was a new boy in town. But gradually it got a little bit better. So after two years, I said, I'll do one more year. And after three years, I said, I'll do maximum one more year. In fact, I'm 40 years past since I first arrived in Hong Kong, but I don't regret it. I think I've been very lucky to see things, transformation of Hong Kong and even more transformation of China.
Rachel Pether: (03:00)
I Think that's the typical expert story, isn't it? You go somewhere for two years and you end up staying for a lifetime in many cases. As the founding chairman of the Hong Kong retirement schemes association, what led you to establish that in the first place?
Stuart Leckie: (03:15)
Well, what was happening was that Hong Kong had a very poor record for social security or things like unemployment, healthcare and so on. The government actually decided to establish this Mandatory Provident Fund. Which is not really a pension scheme. It doesn't give a monthly income after retirement. It's really a sort of compulsory savings scheme. But when this was being discussed in the 1990s, there was a great deal of mystery and lack of understanding. It seemed to me that we should have some organization where we could approach the government and say, this is okay, but something else is not good enough and you must explain and so on and so forth. We were meeting a need at the time to form a proper professional organization that people would be able to turn to. We were lucky to get a good speakers and to get some good rapport with the other countries, particularly UK and Australia. Things just developed from there.
Rachel Pether: (04:18)
And how's it working then with the handover of Hong Kong to China and the integration with the pension schemes?
Stuart Leckie: (04:26)
Well, when Hong Kong set up the Mandatory Provident Fund, that was purely for Hong Kong and China in fact has its own quite complex pension system. In fact, more than one system. In the long run after the 50 year period has passed, one presumes that the Hong Kong retirement system will be folded into the Chinese pension system, but that's not really been confirmed yet until we got quite a bit closer to the year 2047, which is when the ultimate handover will take place.
Rachel Pether: (05:08)
I guess the Chinese economy is so much more complex than the Hong Kong one. What are some of the considerations within the Chinese pension system given that there's such a bifurcation, I guess, between the rural population and the urban population?
Stuart Leckie: (05:26)
Yes. Well, that's right. China has two totally different pension systems for the urban population in towns and cities and the rural population in the countryside. Every pension system has two sides to it. First of all, there's the design of the system. And secondly, it is the funding or the financing of the system. So the Chinese pension system for the urban population is actually quite a sensible design, but there's a huge shortage of cash to finance it. So what's going to happen is that the cash requirements to pay out the pension benefits in future, is going to increase and increase and become a very serious burden once the numbers of employed people in China are greatly expand.
Stuart Leckie: (06:15)
In the meantime, the rural population is just a very small amount because the farmers, even though they're encouraged to save for retirement, if they need a new tractor or if they fail a harvest, they can't even think about retirement. They've got to solve the urgent problem now. So many considerations. Salary's of course vary tremendously between the rich cities of Shanghai, Beijing, and the poor towns and cities in the countryside. You have this big disparity in wages and that inevitably means a big disparity in pensions. Which in one way, doesn't seem fair, but there's probably reality for many years, if not decades to come.
Rachel Pether: (07:06)
I remember that reminds me of a comment that you actually made in Singapore which really stuck with me. You said that China will grow old before it becomes rich. So how does the demographics play into that split as well?
Stuart Leckie: (07:20)
Yes. Well, Chinese population is just coming up to 1.4 billion and it will peak actually very soon within the next decade and then have a long slow decline. The United Nations produces very good population projections. By the end of this century, we would expect China's population to be down just probably a little over 1 billion. In the meantime, India, the Indian population is growing pretty rapidly. First of all, India is going to overtake China, and at the end of the century, we expect India's population to be somewhere between 1.4 and 1.5 billion. These are huge numbers with huge implications as far as finances and for getting the demographic projections correct.
Rachel Pether: (08:12)
Do you think in terms of the pension system, there's any resistance or the pushback to the one child policy in terms of how it's affected demographics and how that might affect people in terms of getting their pensions when they do eventually retire? How does that factor into the equation?
Stuart Leckie: (08:33)
Well, absolutely. Basically until quite recently, all the projections were done in the basis of one child. Now in fact, China's realized that there is a cost and there is a downside to the one child policy. About five years ago, they amended the one child policy to a two child policy. Now, in fact, the government have been quite surprised, quite disappointed that not more people are having more than one child. What's actually happening in major cities in China is that, and this, of course it's happening in many other cities worldwide, if a couple of one child then that's fine.
Stuart Leckie: (09:16)
But if they have two children, then they need a three bedroom flat. And so that's not so easy. And the environment where both husband and wife basically have to work in order to compete for income and pensions and education and housing and so on. It's really been a very interesting phenomenon to watch conditions in the major cities in China become closer and closer to Hong Kong. Interestingly enough, the fertility rate in Hong Kong is just about the lowest in the world. A rich society, lots of freedom, but people are very leery about having more than one child.
Rachel Pether: (10:01)
And has that always been the case or you think that's associated with the increase in costs of living and expenses?
Stuart Leckie: (10:10)
Yeah. Well, if we go all the way back to the foundation of people's Republic of China in 1949, at that stage, and of course virtually the whole population was rural, but at that stage, the average family had between five and six children. This in fact has benefited China in the last few decades with them. Lots of those people, five and six children now in the workforce, or having been in the workforce. But it is not going to help them going forward. Whereas, the proportion of people over retirement age is increasing pretty rapidly now.
Rachel Pether: (10:50)
Do you think it's also leading people to work longer or start earlier? We heard those stories of child labor and China and people starting work or being forced to work from quite young. Do you think that this pressure or this tension is impacting that as well?
Stuart Leckie: (11:12)
Absolutely. We have this phenomenon of migrant workers in China where something like maybe 80 million people from the countryside actually work in towns and cities. Usually the male will work on a building site, the women will work in a restaurant or a factory. And so they've got two incomes to send money back home where maybe they've got one child, maybe a got two children. Hopefully from the age of maybe seven, the youngsters can feed the chicken and feed the ducks, but they can't really do farm work. And so the parents try to get back to whatever village they come from at Chinese new year. And which of course is just awfully important to Chinese people. This migrant workers phenomenon, it's really one way of factories having access to cheap labor, but it's probably not very good for the young kids to be left alone or maybe left with a grandparent for 11 and a half months of a year.
Rachel Pether: (12:22)
No, certainly. That does seem like quite a lot of responsibility to place on young shoulders. I do want to dive into some of the other risks that you see facing China, but we've actually already had quite a few questions coming in from the audience that relate to Hong Kong so I'll address those as well. Someone has also just asked for clarification on what the Hong Kong retirement system looks like and does it have multiple pillars?
Stuart Leckie: (12:52)
Well, the Hong Kong retirement system, called the Mandatory Provident Fund, it's mandatory, compulsory. It's provident fund in that it's a lump sum scheme. Individuals pay 5% of salary up to a ceiling and the companies pay 5% of salary also. This is accumulated. There is a choice of fund, there's a very wide choice of funds now. You can be equities, you can be bonds, you can be a cash bond, different currency's and so on. There's no shortage of fund.
Stuart Leckie: (13:26)
People are not encouraged her switch funds too often, but it is very possible if you want to try to do that. The weakness of the system is that when you get to retirement age 60, or maybe 65, then you're going to get a lump sum. But the question is, what do you do then? What people need is an income. They got to have an income to live on, not a lump sum that they may be able to invest wisely that very often they may not be able to invest very wisely. This is the biggest single flaw in the system of how are individuals going to convert a lump sum to a pension because the government isn't going to do it for them.
Rachel Pether: (14:12)
That seems quite a lot of responsibility to place on the individual as well that might have no investing knowledge, as you say. Someone has also asked about your personal views. I guess this ties in to people looking at various funds, so fixed income and equities, what's your outlook on emerging markets, fixed income and equities. Specifically, if you could talk about Asia.
Stuart Leckie: (14:40)
Wow. How much time do I have? These are big questions. Personally, I'm a bit of an equity man. I tend to have more in equities than anything else on the basis that, I know it'll be volatile but I'm not planning to sell up anytime soon. So quite happy to have predominantly equities. I think part of the question related to fixed income or emerging market fixed income, sure, why not a five or 10% in that, but I certainly wouldn't put everything into emerging markets, fixed income. We've got problems in places like Argentina. Once again are on the verge of defaulting. I would just say to people, by all means have a quite a bit in equities, by all means have a balanced fund, very good thing. There are a number of sort of ETF type of funds like index funds. And then you should just mimic the index no better and no worse. Probably don't switch too often. That's just a sign of impatience.
Rachel Pether: (15:59)
And so with the Hong Kong, we've had another question from the audience come in about the way the Hong Kong pension retirement schemes association actually invest, given that it has this lump sum payment at the end. Does that encourage it to take on more risks than say another pension fund might because it doesn't have defined annual ongoing liability streams or how does it actually invest?
Stuart Leckie: (16:28)
Well, the way it works, retirement scheme association is really a trade body. It's not actually doing the investments themselves. But it will from time to time have speakers from different fund managers or different parts of the world coming to talk about how they see things. That's the nature of the organization. Also, if there's something that the government are doing and maybe somebody that government are not doing, and retirement scheme association together with others, of course, can approach the government and say, look, this is not good. We need to change this. We need to amend. The situation is you cannot get your money out to the system until you retire or get to at least age 60. And then you have to think Very, Very carefully about how long you may have a happy and productive retirement life so that you don't run out of cash.
Rachel Pether: (17:26)
Yeah. I guess that's something that we're all concerned about. We've also had a number of questions come in relating to the mainland China pension scheme as well. More about, I guess, the specifics of it. In terms of the Chinese pension systems then, that typically works as a typical pension does it? In terms of, monthly payouts upon retirement and standardized retirement age at 60 or 65?
Stuart Leckie: (17:58)
That's correct. First of all, it is a pension system. The retirement age is used to be 60 and used to be 55 or even 50 for women. That's being pushed up now. And of course, what they should be doing is having a retirement age probably more like 65 to tie in with the life expectancy now and not just stop at 60. The second part of the question was?
Rachel Pether: (18:30)
That was more about if it was just a typical pension scheme in terms of receiving monthly payouts once you retire.
Stuart Leckie: (18:37)
Well, it is except when the current system started off based on something called document 26 of 1997, as it happens. This was ideally to give the average person, average urban worker to give him somewhere maybe round about between 50 and 60% of final salary. So if you've got 50 to 60% are final salary, and as long as your salary is not totally inadequate, you should be able to live quite well. One of the concerns is that knowledge in China of how the pension system works is very, very scarce.
Stuart Leckie: (19:19)
It's now almost given up and having a funded system, so they're basically having to rely and pay as you go. In other words, contributions collected this month are just paid out next month by way of benefits. That's okay so long as the population is stable. But we know that the aging increase is going to be very severe. I think if my numbers are correct in about 20 years time, the number of people aged over 60 in China will be about 28% of the total population. This is going to be a huge burden on the workers let's say 20 years from now, having to pay these relatively generous pensions to many, many retired people.
Rachel Pether: (20:09)
Now we've discussed in depth on the demographics side of the equation. What are some of the other key risks that you see facing China? I appreciate that, that's another question that could be spoken about for a whole day. But maybe you could highlight where you see some of the other key risks at the moment.
Stuart Leckie: (20:29)
Well, you could get out of your Atlas and look around in China and many places could be potential risks., Starting off with the South China seas and maybe with North Korea, then how about Mongolia and then special problem with Xinjiang and what's happening with the Muslim population of China being, what is the phrase reeducated, is the phrase. And you've got tension in Tibet and you've got barges between China and India. As we saw quite recently. So there's many geographical issues. Then there's demographic issues that we've talked about already. And then there's also other things like corruption, like pandemics.
Stuart Leckie: (21:18)
This is not the first and it's not going to be the last pandemic we have at the moment. Things like bonds and debt. Sometimes in China, it seems a bit of a miracle that they don't have more problems with banks or other institutions that are getting into default. If you add up all these potential problems, you probably come to at least 15, maybe closer to 20 problems. in a way, it's not that China can avoid these problems, it's just that you should know that you're going to have very big problems from time to time and get ready, or if possible to prepare for it so that you get out of the huge difficulty, whatever it relates to.
Rachel Pether: (22:06)
A couple of questions on the debt piece. Why is it that you think we haven't seen as many defaults from Chinese banks given the high debt possessions?
Stuart Leckie: (22:15)
Well, see, I think the banking commission and the insurance commission have now been integrated into one very big Chinese banking and insurance regulatory commission. I think they do have a kind of early warning system that tries to prevent any big problems happening. But problems do happen. For example, buying insurance company, it was basically mostly a fraudulent company and that was a very seriously large institution. Didn't get too much publicity out here because it wasn't affecting Hong Kong and other countries really internal. But undoubtedly there are probably more problems than we might care to see from the outside.
Rachel Pether: (23:04)
You also mentioned debt as it relates to this sovereign wealth fund world as well. I believe that CIC actually borrowed from it. So they essentially issued bonds to create the farm. They borrowed from the future. Is this a typical structure that Chinese do? It's very unusual for a sovereign wealth fund to actually establishes itself in this way, rather than taking commodity revenues as they have them in middle East with oil.
Stuart Leckie: (23:39)
Yes, I would agree. It's pretty unusual. If we just think about sovereign wealth fund for a moment, there's two types. There's the genuine sovereign wealth fund, which is pretty well independent from government and they do the right thing, investment wise. Independent audit and independent management and so on. And the second type of sovereign wealth fund is what are called a quasi sovereign wealth fund. Whereas a lot of influence or control by government or by the ministry of finance. Basically they have to do what they're told. The example of a genuine one would be, for example, they Norwegian sovereign wealth fund. An example of a sovereign wealth fund that is only a quasi fund would be CIC in China. There's no way that the government will permit CIC to do too many independent things.
Rachel Pether: (24:36)
You've been in Hong Kong now for what, over 20 years, what's it been like on the ground with the tension that you've seen playing out with China? I appreciate you're not there at the moment, which we'll also dive into shortly, but maybe you could give your firsthand account of how it's been actually living in Hong Kong.
Stuart Leckie: (25:02)
I've been there two times, 20 years, nearly 40 years, in fact. I think the first 20, probably first 30 years, everything was good. Everything was positive. The economy was expanding. Hong Kong was doing exceedingly well. But in the last year or so, we've had [inaudible 00:25:27] problems being the riots in favor of democracy and then with the pandemic, and then with this introduction of the new national security law, which is very unpopular in China, as a Chinese law that has been forced upon Hong Kong. It seems to me that what the Chinese government is trying to do, they're trying to convert Hong Kong into being a Chinese city just as rapidly as they can. I guess many people thought this would happen maybe just at, or just before the year 2047. But it's happening now when we're only sort of halfway between 1997 and 2047.
Stuart Leckie: (26:22)
Hong Kong will, it doesn't become a very major city because population at the moment, seven and a half million, it might go to 9 million. But when you compare it with Shanghai's 22 million, Beijing's 23 million and so on. Hong Kong is not going to be anything like the biggest city or the most important city in China. So as long as we realize that, and I mean, Hong Kong is a wonderful place in many ways. The weather can be very attractive and a lot of other good things in Hong Kong, but it is going to change in a way that maybe some of the expatriates don't care for.
Rachel Pether: (27:06)
I guess this is probably only been highlighted by the current pandemic. I think we'd be remiss not to talk about that, given that your now sitting in Scotland unable to travel freely back to Hong Kong. How do you think that the current pandemic has maybe accelerated some of the issues that you've discussed? I guess you were out there during SARS as well. So maybe you could talk about maybe how that's prepared Hong Kong or how the impact of previous things have played out.
Stuart Leckie: (27:41)
Yes. Well, since you mentioned SARS, I mean SARS in many ways is much more serious than the pandemic so far because about 300 people in Hong Kong died as a result of SARS, nothing we're like that in Hong Kong with COVID. I think in some ways the challenge of COVID is that people don't quite understand it. It's very hard to predict what's going to happen with its application to individuals or the second wave or even third waves. There's so much more that we need to learn about the pandemic. If we look over the history, then of course there's been pandemics in Europe, there's been pandemics in Asia from time to time, but this one is perhaps a little bit more frightening to people because I guess many people thought that this sort of thing just couldn't happen in modern day society, but it absolutely can happen.
Stuart Leckie: (28:49)
My situation is that I came back to UK just before Christmas, last December, but at the time I was coming back to visit Hong Kong. In fact, things deteriorated quite a bit and I could have actually got into Hong Kong after two weeks quarantined by Hong Kong and then two weeks quarantined by the UK. That was really just to high a price. But I actually do my Hong Kong work in the mornings. I've got a home office set up and that's quite efficient in email and phone and so on, in speaking to all the people in Hong Kong, I have to work with.
Rachel Pether: (29:32)
Remote working has, I mean, I think everyone's just appreciating how easy it is to do and how you can do it from anywhere. We have a lot of audience questions still coming through. We only do have five minutes left, so I'll end on a couple of serious questions and then a more lighthearted one to finish. Just a more specific question about China and the pension scheme. Is it committing towards overseas infrastructure projects, such as China's state development investment corporation? I appreciate, we actually, haven't spoken about one belt, one road admits actually on purpose. I know that could be another entire discussion, but are you seeing China commit much to infrastructure projects?
Stuart Leckie: (30:24)
Yes. We've got the whole road belt and system, system. That's of course trying to do good and to help a lot of smaller countries. But of course, it's also serving China's aims of getting more influence and more involvement in many, many countries. I think China and the amount that it's happy to invest outside of China. That is a key question. We've got things like the new Asian infrastructure bank, which is perhaps competing with Asian development bank. I think it'd be very interesting just to see how this develops. There have been quite a lot of criticisms in some countries as to the attitude or the way that the Chinese have been acting almost like a colonial power. There's certainly issues there to be solved. But I think China's smart enough to implement the one belt system and so on without causing too much angst on the other side.
Rachel Pether: (31:42)
That's interesting. Now we actually have time for one final question. There have been quite a lot of discussions about China issuing a digital currency as well. What are your thoughts on a future role for cryptocurrencies in China, particularly if it's a Chinese government issued currency, do you have any view on that?
Stuart Leckie: (32:08)
I don't own any digital currencies and I don't plan to and I wouldn't advise anyone else to. [inaudible 00:32:18] This extent.
Rachel Pether: (32:20)
Do you think that the Chinese government is likely to go ahead and issue their own digital currency? I know there's been some talk of that for quite some time.
Stuart Leckie: (32:32)
I think if China was to do that, it would be with the sole purpose of them disturbing and disrupting and other countries' currencies.
Rachel Pether: (32:45)
Wonderful. Well, we only have a couple of minutes left, Stuart, so I just wanted to thank you so much for your time today. You've answered a lot of difficult questions and given a really great overview onto both the Hong Kong and Chinese market. Thanks so much for joining us today and hopefully you'll come back on and we can do a deep dive into one of the topics further.
Stuart Leckie: (33:06)
Thank you very much indeed, Rachel.