China to Allow Pension Fund to be Invested in the Stock Market

China to Allow Pension Fund to be Invested in the Stock MarketAs China faces challenges on its aging population, now they are allowing China’s pension fund to invest in the stock market to help keep value and improve its management. An official drafted guideline that was recently released stated that its giving the go signal to invest in the stock market but with certain restrictions such as the maximum proportion of investment in stocks and equities to just 30 percent of total net assets.

The move was to improve investment management and supervision of the social security fund and to diversify investment channels. In China, urban employees usually pay for their pension just before retirement and gets pension that is equal to around half of their previous salary. Those with outstanding contributions to the fund stands at 3.06 trillion yuan by the end of 2014. The money in the fund which is roughly 90 percent of the country’s total social security fund pool was deposited in banks or invested in treasury bonds that were criticized because of rigid management and low returns.

The Chinese Academy of Social Sciences estimated that the pension funds depreciated to nearly 100 billion yuan in the past twenty years plus inflation. Experts along with retirees called for diversified investment but the government still remained cautious due to an immature domestic market. Although a recent bull run and improved supervision built confidence for the right authority to make their move. Besides the stock market, the pension fund may be invested in government and corporate bonds, leading state owned enterprises and national construction projects.

The new guidelines will lift restrictions and will awaken the sleeping capital, although the impact on the stock market is limited as analysts sees the move to be more of a policy breakthrough rather than a practical boost to market shares. However there is also a chance of a unexpected volatility in the market which brought worries on the prospects for a new policy as major indices in Shanghai and Shenzhen exchanges have tumbled 2.34 and 5.78 percent respectively. Risk control will be to set up reserve funds that are valued at 20 percent of management fees and 1 percent of yearly returns in hopes to offset losses.

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