2nd LD-Writethru-China Focus: China pension fund allowed to invest in stock market

China's State Council published the final guideline on investment for the country's massive pension fund on Sunday, effectively opening the gate for its investment into the stock market.

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 percent 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.

Provincial-level governments determine the capital amount to be invested first and only the institutions authorized by the State Council can operate such capital. All details shall be reported to the Ministry of Human Resources and Social Security and the Ministry of Finance.

The guideline will be effective since the day it's published.

The move 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.

Senior citizens over 65 years make up more than 10 percent of China's population and the ratio may rise to a third by 2050. A country is considered an aging society if the ratio is higher than 7 percent.

While pushing for diversified investments, the State Council stressed an "active and cautious" approach in the process. "The management of the funds must prioritize safety and firmly control risks," it reiterated.

In order to do so, fund managers are required to set up reserve funds valued at 20 percent of management fees and 1 percent of yearly returns to cover for possible losses.

Liu Yuhui, an economist at the Chinese Academy of Social Sciences, said the move is to improve the investment situation and attract more institutional investors.

China's pension fund, which accounts for roughly 90 percent of the country's total social security fund pool, had net assets of 3.5 trillion yuan (547 billion U.S. dollars) by the end of 2014.

The new policy comes as China's stock markets continue to decline, beset by shrinking turnover and greater volatility. The key Shanghai index plunged 4.3 percent on Friday following the release of weak economic data. It has declined more than 30 percent from its June peak, wiping out most of this year's gains.

Luo Yi, an analyst at Huatai Securities, said the policy would boost the stock market, especially blue-chips such as financial shares.

Wang Han, an analyst at Industrial Securities, global experience indicated a bright future of China's pension fund in stock market as the move will create long-term and stable returns for citizens.

The fund for retirees, which began operation in the early 1990s, has aroused concern as its annualized investment yield hovered as low as around 2 percent over the past several years, falling short of the consumer price index, a main gauge of inflation.

China's pension fund depreciated by nearly 100 billion yuan in the past 20 years, taking inflation into account, said Zheng Bingwen, an expert from the Chinese Academy of Social Sciences.

The stock market will help avoid the diminishing value of pension fund and stabilize the country's capital market, said Li Daxiao, chief economist with Yingda Securities. Endi