China will allow its huge state pension fund to invest in domestic stocks in an attempt to boost returns as China struggles to care for its increasing elderly population.
The fund will be able to invest up to 30 percent of its net assets in equities, according to final guidelines published by the State Council yesterday.
The fund, to which workers must contribute, had 3.5 trillion yuan (US$548 billion) in net assets at the end of last year.
The move could allow the fund to invest billions of yuan into domestic equities after a stock market rout forced the government to take emergency support measures.
Previously, the pension fund could only invest in treasury bonds and bank deposits.
The new rules also allow the fund to invest in convertible bonds, futures and infrastructure projects.
The fund will also be used to participate in major projects and purchase shares in state-owned enterprises to gain long-term yields.
Provincial-level governments determine the capital amount to be invested first and only the institutions authorized by the State Council can operate such capital.
The move is intended to create more value for the massive fund, which was previously parked in banks or invested in treasury bonds with low yields, a condition that has long spurred calls for changes as China faces a huge challenge in caring for its elderly population.
Citizens over the age of 65 make up more than 10 percent of China’s population on the mainland and the ratio may rise to a third by 2050.
A country is considered an aging society if the ratio is higher than 7 percent.
While pushing for diversified investments, the State Council stressed an “active and cautious” approach. “The management of the fund must prioritize safety and firmly control risks,” it said.
In order to do so, fund managers are required to set up reserve funds valued at 20 percent of management fees and 1 percent of yearly returns to cover for possible losses.
Liu Yuhui, an economist at the Chinese Academy of Social Sciences, said the move was aimed at improving the investment situation and attracting more institutional investors.
China’s pension fund accounts for roughly 90 percent of the country’s total social security fund pool.
The new policy comes as China’s stock markets continue to decline, beset by shrinking turnover and greater volatility.
The key Shanghai index plunged 4.3 percent on Friday following the release of weak economic data. It has declined more than 30 percent from its June peak, wiping out most of this year’s gains.
Luo Yi, an analyst at Huatai Securities, said the new policy would boost the stock market, especially blue-chips such as financial shares.
Wang Han, an analyst at Industrial Securities, said global experience indicated a bright future for China’s pension fund in the stock market as the move will create long-term and stable returns for citizens.
The fund for retirees, which began operation in the early 1990s, has aroused concern as its annualized investment yield hovered as low as around 2 percent over the past several years, falling short of the consumer price index, a main gauge of inflation.
The pension fund has depreciated by nearly 100 billion yuan in the past 20 years, taking inflation into account, said Zheng Bingwen, an expert from the Chinese Academy of Social Sciences.
The stock market will help avoid the diminishing value of the pension fund and stabilize the country’s capital market, said Li Daxiao, chief economist with Yingda Securities.
(Source: Xinhua)
