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China to allow massive pension funds to buy stocks, A-shares surge
China announced a proposal allowing the country’s pension funds to invest in its stock market, in an apparent attempt to boost local shares after sharp falls recently.
Christina Wang 30 Jun 2015

China has announced a plan allowing the country's pension funds to invest in its stock market, in an apparent bid to boost local shares following their recent slump.

 

The Shanghai Composite index fell 20% over the past two weeks, and saw another 3% decline on Monday as worries about a slowing global economy persists. But proposals released June 29 by the Ministry of Finance and Ministry of Human Resources and Social Security suggesting that up to 30% of the assets in pension funds will be allowed to invest in equities, reversed market sentiment.

 

The Shanghai Composite Index jumped 5.5% to close at 4,277.22 points on Tuesday.

 

The outstanding value of pension funds stands at about 3.5 trillion renminbi (US$560 billion) as of end 2014. Deducting the amount set for expenditure, the investable universe is over 2 trillion renminbi. Under the 30% allocation limit on equities, the money that can buy stocks is about 700 billion renminbi, according to estimates of Ping An Securities.

 

China's official Social Insurance Funds cover five major areas for Chinese citizens, namely pension, medical care, occupational injury, unemployment and maternity insurance. The latest proposal applies exclusively to pension funds, which used to be only allowed to invest in bank deposits or government bonds. The funds' recorded average annual return is about 2%.

 

Ping An Securities analyst Wei Wei notes that while the news helped bolster shares,  the actual implementation of the policy may take time given the pending issues such as the appointments of custodians or investment managers.

 

So far, there are four domestic banks qualified as custodian for pension funds, and 12 fund companies qualified to manage the pension investment.

 

But industry observers believe that the National Council for Social Security Fund (NCSSF) has the best chance of winning the mandate.

 

NCSSF currently manages the country's social security fund. The funding sources of NSSF include fiscal allocation from the central government, allocation from the lottery public welfare proceeds, capital or equity assets derived from reduction or transfer of state-owned shares, capital raised by other methods approved by the State Council, and the investment proceeds there from, according to its website.

 

Established in 2000, NSSF has now over 1.2 trillion renminbi in assets, and reported an average annual return of 8.38%.

 

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