BEIJING (Reuters Breakingviews) - China has moved a step closer to investing $290 billion worth of public pension funds in financial markets, including stocks. That's a small step in the right direction of adding institutional investor gravitas to an erratic market, but more needs to be done to ensure comfortable retirement for China's rapidly aging workforce.
The government named four banks tasked with acting as custodians of the pension insurance fund this week. They will guide funds into higher yielding assets like stocks and corporate bonds, as opposed to the bank deposits and treasuries they are currently required to hold. The first tranche could be invested as early as next year, the state-run Securities Daily reported, citing an academic.
Depending on how the portfolio is allocated, the amount of pension money invested in shares from this first tranche might be as low as $3 billion, out of a reserve of around $579 billion - hardly enough to spark a rally. But greater participation by institutional investors in the stock market has been a long-term government goal. Shanghai and Shenzhen exchanges – with a combined market capitalisation of $7.7 trillion – are roller coasters thanks to the dominance of individual retail investors, who conduct an estimated 80 percent of trades.
Graphic: The Shanghai Composite has produced substantial returns over time: reut.rs/2fGtXG6
To address the bigger demographic challenge, however, China will need to put more pension money to work. The working population of the People's Republic is declining. By 2050, there will be just 1.5 workers for every retiree, according to a paper published by the Paulson Institute, but the pension pots are full of holes. The World Bank says local governments are already dipping into contributions to pay existing retirees, and state media estimate that the shortfall could top $11 trillion within 20 years. In this context leaving pension money parked in low-yield deposits is risky, especially if inflation accelerates.
Of course, wild market swings mean that pension funds with fixed liabilities are exposed to major downside risk if they go into Chinese stocks at the wrong time. The CSI300 composite index is up around 70 percent since end 2006, but down 33 percent from the end of 2007.
But given the alternatives, putting more money into shares looks sensible. For China's pensioners, there is no risk-free rate.