China’s state pension funds can now invest big in the country’s volatile stock markets

There goes your retirement.
There goes your retirement.
Image: Reuters/Stringer
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Beijing can invest nearly $100 billion of China’s state pension funds, about a third of the total available for investment, into the country’s volatile stock markets this year, state media reported, bringing a “wave of liquidity” to the moribund markets.

Previously, China’s pension funds, which account for 90% of the country’s social security funds, were only allowed to invest in safer assets like bank deposits and treasuries. The new regulations will also allow investment in bonds, asset-backed securities, index futures, bond futures, and the country’s major infrastructure projects. China’s state pension fund was nearly 4 trillion yuan at the end of last year, according to the ministry of human resources and social security. Half the money is available for investment, and the other half is paid out to retirees.

The change was sparked by China’s $5 trillion sell-off last June, and is designed to bring more liquidity to the stock markets. In August 2015, China’s cabinet finalized new regulations on pension fund investment, allowing up to 30% of their investible assets—equivalent to around 600 billion yuan ($92 billion)—in stocks, equity funds, and bond funds.

Institutional investors, authorized by China’s cabinet, will invest pension funds consolidated from local governments, but there are no further details. In China’s current pension system, 837 million people are contributing to the pension fund for about 226 million retirees. Employees pay 8% of their monthly salary into individual pension accounts, while employers contribute 20%.

The new scheme is being portrayed as a win-win for China’s stock markets and pension system. On the one hand, the Shanghai and Shenzhen bourses are still weak, despite the fact that the government, hand in hand with the country’s biggest brokers, pumped billions of dollars into stocks. China’s retail investors are counting on the entry of pension funds to prop up the market—even more than the long-expected Shenzhen-Hong Kong stock connect, according to a recent survey (link in Chinese) by the Shenzhen Stock Exchange.

On the other hand, the Chinese government faces a challenge in meeting required pension payments, thanks to its decades-long one-child policy that just ended last year. Some analysts say the shortage between what China’s pension funds need to pay out and are taking in could rise to as high as $11 trillion over the next two decades. China is also raising the retirement age this year.

Still, mixing social security payments with stocks sounds like a bad idea to many. Pension fund investors will entirely control stock market trends, Nie Riming, a researcher with the Shanghai-based SIFL Institute who studies finance and laws in the nation, told the China Securities (link in Chinese) newspaper.