China to invest pension fund in stock markets

In a surprise move, China today permitted its $547-billion pension fund, the largest in the world, to be invested in stock market barely weeks after its biggest crash which wiped out about $4 trillion capital between June and July.

China’s cabinet published the final guideline on investment for the country’s massive pension fund, effectively opening the gate for more diversified and riskier products, state-run Xinhua news agency reported.

The final plan, released after considering public opinion, allows the pension fund to be invested in new products, including domestic stock markets, but restricts the maximum proportion of investments in stocks and equities to 30 per cent of total net assets. The fund will also be used to participate in major projects and purchase shares in state-owned enterprises to gain long-term yields, the report said.

The government defended the move saying it 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 increasing elderly population.

While pushing for diversified investments, the cabinet stressed an “active and cautious” approach in the process.

“The management of the funds must prioritise safety and firmly control risks,” it said.

China’s pension fund, which accounts for roughly 90 per cent of the country’s total social security fund pool, had net assets of 3.5 trillion yuan ($547 billion) by the end of 2014.

The risky move came as after the recent sell-off, which according to the official media reports wiped out $4 trillion in market value between June and July.

Following this, over 20 million small investors deserted the stock markets despite a series of measures announced by the government to infuse confidence in the markets, which staged recovery of sorts amid infusion of capital by state-run financial institutions.

The move to permit pension funds also comes in the immediate backdrop of China devaluing its currency by about four per cent amid the economic slowdown.

The move was largely interpreted as an attempt to boost sagging exports.

Economists are linking the central bank’s move to China’s bid to get the yuan included in the Special Drawing Rights (SDR), international reserve currencies used by the International Monetary Fund (IMF).

An IMF forecast of Chinese economy said the world’s second largest economy will grow at 6.8 per cent, which is lower than the seven per cent target set by the government.

In its recent World Economic Outlook Update, the IMF forecast the Chinese economy to grow 6.3 per cent in 2016 and 6 per cent for 2017.

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