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China to Open Stock Markets to Pension Funds

Investors look at computer screens showing stock information at a brokerage house in Shanghai, China, July 8, 2015.
Investors look at computer screens showing stock information at a brokerage house in Shanghai, China, July 8, 2015.

China said Friday that local pension funds will soon be able to invest up to $94 billion in domestic shares, in a bid to boost investment returns.

The Finance Ministry made the announcement following the State Council’s finalization of measures to grant pension funds access to local shares for the first time.

Vice Finance Minister Yu Weiping vowed to kick-start the funds’ investment operations “as soon as possible."

Under the new initiative, up to 30 percent of that capital can be used to acquire domestic stocks, equity funds and balanced funds. The rest can be invested in money-market instruments, asset-backed securities, index futures and bond futures in China.

Yet the actual timing of such share investments must await the establishment of institutional investment firms to manage the funds, which analysts expect may take at least six months.

Already the move is seen by retail investors, which make up the bulk of share investors in Chinese stock markets, as fresh support from the government to prop up struggling stock markets.

Also encouraged by gains on Wall Street, the CSI300 Index of the largest listed companies in Shanghai and Shenzen surged sharply Friday to close up 4.3 percent, while the Shanghai Composite Index gained 4.82 percent. For the week, the Shanghai index dipped 7.9 percent and the CSI300 fell 6.9 percent.

Chinese officials downplayed speculation that pension funds initiative was meant to bolster the stock markets.

You Jun, vice minister of human resources and social security, told Friday’s media briefing that pension investments will benefit the country’s economy and capital markets, but that propping up the stock markets wasn’t the responsibility of the funds.

He said that the government will protect the safety of such funds by diversifying their investments. Analyst also warn that it will be unrealistic for short-term share investors to speculate on the boost from pension fund investments as the nature of such investments will be long-term and the capital won’t enter the stock markets until 2016.

But all in all it’s good news for China to bring in institutional money, which more often reacts to fundamentals instead of market rumors, said Stephen Ma, head of greater China equities at BMO Global Asset Management.

“If pension funds can be a bigger investor in the domestic markets, they should be run by institutional fund managers, so, hopefully, that will be reducing the volatility,” Ma said.

The People’s Bank of China on Tuesday cut interest rates and lowered the amount of reserves banks must set aside for the second time in two months, acting amid pressure from global stock market turbulence and massive capital outflows.