Stock market too immature for Chinese pension funds

Lack of corporate governance and the poor quality of listed companies on China''s stock exchanges is preventing pension funds from entering market.

Pension funds cannot enter China's stock markets until improvements are made to the quality of listed companies, according to Li Yining, vice-chairman of the financial and economic committee of the National People's Congress.

Speaking at a recent international symposium on social security and pension fund management in Beijing, Yining added directors must be allowed to function independently and effectively to make this entry possible.

In a report by Chinese finance publication Securities Times, attendees at the symposium agreed that to allow pensions funds to enter the market now would be a premature move and could negatively impact the equity market. The World Bank projects that with a funded pension system, China should be able to accumulate assets of US$1.8 trillion by 2030. Li also remarked that the Securities Law is not expected to be revised in the near future.

An early entry of pension funds into the equity market is hampered by a lack of risk-reduction techniques, overactive speculation and problems with the existing systems, says He Ping, director of the Social Security Research Institute, a body run by the Ministry of Labor and Social Security.

A new pension system was implemented in China four years ago that established individual pension accounts for active workers in state enterprises. Contributions were to be monthly, both by workers and employers. But this new system left a gaping need for pension funds for workers retired or hired before 1997, which the system did not cover, but who expected equal treatment.

Last year, a report by the State Council Office for Economic Restructuring suggested China could raise billions of yuan by liquidating some state assets to finance the huge shortfall. To illustrate the importance of these funds in China, the country is expected to face what has been coined the "1-2-4" phenomenon รป one child, two parents, four grandparents. By 2020 it is estimated that 16% of the Chinese population will be over 60, and by 2030, the number will rise to 22%.

Entry into the equity markets in China would be important to preserve the value of the funds, should all the circumstances be optimum.

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