Emerging Markets, Stocks

China’s National Pension Fund Likely To Be Allowed To Invest In Stock Market, Xinhua Says

China’s national pension fund will likely be allowed to start investing into the stock market, China’s state-run Xinhua News Agency reports on Monday.

renminbiAccording to Xinhua, an official draft guideline was released on Monday which gives the fund the greenlight to start investing in the stock market, however there will be restrictions on the maximum proportion of investment in stocks and equities to 30 percent of total net assets.

The move is aimed at improving investment management and supervision of the social security fund and to diversify investment channels, Xinhua said, citing a statement from the Ministry of Human Resources and Social Security (MHRSS) and Ministry of Finance.

In China, urban employees have to pay for their pension before they retire and usually get a pension equal to around half of their previous salary.

Outstanding contributions to the fund stood at 3.06 trillion yuan (around 500 billion U.S. dollars) at the end of 2014, according to the report.

According to Xinhua, the money in the fund, which is roughly 90 percent of the country’s total social security fund pool, was previously only deposited in banks or invested in treasury bonds, which has been strongly scrutinized due to rigid management and low returns.

The Chinese Academy of Social Sciences (CASS) estimates that China’s pension fund has depreciated by nearly 100 billion yuan over the past 20 years, taking inflation into account.

Experts and retirees have called for diversified investment for years, however the government has remained cautious due to an immature domestic market. But a recent bull run, that recently came to an end, combined with improved supervision has built enough confidence for the authority to finally make a move, Xinhua says.

Chinese stocks have surged over the past 12 months with the Shanghai Composite Index rising 152 percent and reached a 52-week high through June 12, and the market cap of Chinese stocks rose above $10 trillion for the first time ever, however stocks changed direction and recently suffered their biggest two-week plunge since December 1996 after falling over 20 percent and fell into a bear market on Monday.

Shanghai Composite Index 06-28-2015

Aside from investing into the stock market, the report says that the fund will also be able to invest in government and corporate bonds, major national construction projects, and leading state-owned enterprises (SOE).

“The guideline lifts restrictions and will awaken enormous sleeping capital,” Xiong Hui, social security expert with Southwest University of Political Science & Law told Xinhua, suggesting that burdens on the government and employers will be relieved.

Xinhua notes that the impact on the stock market may be limited, as analysts see the move as more of a policy breakthrough than a practical boost to shares.

Zheng Bingwen, a researcher with CASS, told Xinhua that around only around 300 billion yuan in the fund is estimated to be channeled into the market, which is far below the 30 percent cap.

Xinhua says that in the bigger picture, the guideline is the latest attempt by the government to address the problems of an aging population, which includes a diminishing work force growth and weak domestic consumption.

China’s senior citizens over 65 years comprise for over 10 percent of the country’s population and the ratio may rise to a third by 2050, the report says.

A country is considered an aging society if the ratio is higher than 7 percent.


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