Date
22 May 2017
Capital outflow from the stock market has been gathering speed. Last week, institutional investors pulled 471.92 billion yuan (US$74.27 billion) from equities. Photo: CNSA
Capital outflow from the stock market has been gathering speed. Last week, institutional investors pulled 471.92 billion yuan (US$74.27 billion) from equities. Photo: CNSA

What happens now that pension funds can invest in stocks?

China’s A shares have not been spared from a global sell-off.

The Shanghai Composite Index has lost 11.54 percent since last week after state-owned stocks ran out of steam.

Over the weekend, Beijing said it will allow the national pension fund to invest in the stock market for the first time.

The move, which had been widely expected by the market, is likely to stimulate stocks.

Capital outflow from the stock market has been gathering speed.

Last week, institutional investors pulled 471.92 billion yuan (US$74.27 billion) from equities.

The net outflow hit 178.97 billion yuan on Aug. 18 and 98.2 billion yuan on Aug. 21.

The benchmark is close to 3,500 points again, not far from the July low of 3,373 points.

However, most brokerages are optimistic the market will hold, underpinned by government stimulus.

Meanwhile, liquidity has tightened as capital continues to retreat after last week’s surprise renminbi devaluation.

The market had been expecting the central bank to cut the reserve requirement ratio (RRR) over the weekend.

An RRR cut would release several hundred billion yuan but not all of this capital will flow into stock market.

The central bank injected liquidity into the market through a reverse repurchase program last week.

On Sunday, the State Council published regulations to help stem the market slide.

The new rules allow the national pension fund to invest up to 30 percent of its net assets in domestic shares.

The fund will be allowed to invest not only in stocks but also in a range of market instruments such as equity funds and balanced funds, convertible bonds, money market instruments, asset-backed securities, index futures and bond futures, as well as in major infrastructure projects.

State pension funds have combined assets of about 3.5 trillion yuan, meaning as much as 1 trillion yuan could be invested in the stock market.

However, the timetable for implementing the new policy is unclear.

Investors could buy into the market ahead of the national pension fund.

The downside is limited given the massive new capital that is set to enter the market anytime soon.

Pension funds are expected to invest conservatively.

These stocks have attractive valuation after undergoing correction in recent weeks, particularly financial stocks which have a high dividend payout ratio but low P/E ratio.

These counters will benefit from the pension funds’ buying spree as well from improved fundamentals.

Beijing’s decision to tap pension funds came after the so-called “national team”, a coalition of state financial institutions, failed to stabilize the market.

A shares are likely to bottom out soon despite the global market rout.

This article appeared in the Hong Kong Economic Journal on Aug. 24.

Translation by Julie Zhu

[Chinese version中文版]

– Contact us at [email protected]

JZ/JP/RA

a columnist at the Hong Kong Economic Journal

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