One of the major destabilizing forces in the Chinese stock market is the lack of institutional investors.
In an effort to encourage more institutions to invest, the Chinese Ministry of Finance and the Ministry of Human Resources and Social Security last month said pensions plans could invest up to 30% of their assets in the stock market. This would allow as much as 2 trillion yuan of the 3.59 trillion yuan parked in pension funds to trade on the Shanghai and Shenzhen stock exchanges.
If approved, the plan, which was released on June 29, would allow social security ministry-affiliated pension fund managers for the first time to invest in bonds, stock funds, private equity funds, stock-index futures and treasury futures. Fund managers would also be able to invest in national construction projects through and buy stakes in major state-owned enterprises.
Well, now the provincial governments in Shandong and Guangdong “have taken what appear to be the first, cautious steps toward opening the nation’s 3.5 trillion yuan family of public and quasi-public pension funds to stock market investing,” reported Caixin.
Currently, pension fund investments are limited to safe, but low yielding, bank savings deposits and government bonds. However, demographics are beginning to bite at the pension funds’ heels. An aging population is pulling money out of the pension funds faster than their rate of growth.
The gap between the two for all funds rose to 130 billion yuan last year, Zhang Hao, a pension fund inspector at the ministry of social security told Caixin. Spending exceeded income for funds in 18 of the 31 provinces, municipalities and regions in 2014, the ministry said, according to Caixin.
But investing in stocks with all of the cash in a single pension fund can be dangerous, experts told Caixin. Zuo Xuejin, a policy adviser who works for the Shanghai government, said that many funds from which retiree checks are cut are not suitable for long-term investments because of the high frequency of transactions. Hu Jive, a law professor at the China University of Political Science and Law, suggested separating every fund’s individual accounts and payment pools.
To meet payment obligations, many local governments have mixed pension fund payment pools and individual accounts. According to the social security ministry, some 3.1 trillion yuan was withdrawn from individual accounts to make pension payments in 2013, up from 1.1 trillion yuan in 2007.