[HONG KONG] China's pension funds are about to become stock investors.
The country's local retirement savings managers, which have about 2 trillion yuan (S$402.8 billion) for investment, are handing over some of their cash to the National Council for Social Security Fund, which will oversee their investments in securities including equities.
The organisation will start deploying the cash in the second half, according to China International Capital Corp and CIMB Securities.
Chinese policy makers announced the change last year in a bid to boost yields for a pension system that has long suffered low returns by limiting its investments to deposits and government bonds.
For the nation's equity markets - which are dominated by retail investors and among the world's worst performers this year - the state fund's presence is even more valuable than its cash, said Hao Hong, chief China strategist at Bocom International Holdings Co.
The NCSSF has "such a good reputation in being a value investor that if they take the lead, the signaling effect is actually quite strong," said Mr Hong, who had predicted the start and peak of China's equity boom last year.
"It's almost like Warren Buffett saying he is buying a stock."
The NCSSF, which oversees 1.5 trillion yuan in reserves for China's social security system, has returned an average 8.8 per cent a year since 2000, the Securities Daily reported earlier this year, citing official data. The larger pension system, on the other hand, has been locally managed and made just 2.3 per cent annually through 2014, the newspaper said.
The organisation's entry will come as Shanghai stocks begin a gradual recovery that has pared their losses for the year to 16 per cent from as much as 25 per cent.
While yuan depreciation concerns are pressuring Chinese assets lower, the economy is showing some signs of stabilising. The nation's foreign-exchange reserves unexpectedly climbed in June in a sign of slowing outflows, while a measure of services rose.
The entry "will be a positive event in terms of sentiment but the actual impact won't be drastic," said Ben Bei, an analyst at CIMB Securities in Hong Kong.
"The fund will tend to be prudent and the progress may be very gradual - that is, it will enter the market over the next several years."
Venturing into China's volatile stock markets - where a crash erased US$5 trillion of value last year - isn't without its risks for funds traditionally focused on more stable assets. Japan's government pension fund, the world's largest, may have lost about US$43 billion in the second quarter, Morgan Stanley MUFG Securities Co estimated.
This adds fuel to criticism over the Government Pension Investment Fund's decision to boost equity allocations in 2014.
Low returns are a challenge for China's pension system, which is already facing pressure from a rapidly aging population. The country's old-age dependency ratio - a measure of those 65 or over per 100 people of working age - is set to triple to 39 by 2050. The NCSSF didn't respond to an e-mail seeking comment.
The pension funds are more likely to buy blue-chip firms, said CIMB's Mr Bei, while Bocom's Mr Hong said they'll probably seek out shares of state-owned enterprises with low valuations. With the market down for the year, the timing is right for entry, said Mr Hong.
Up to 30 per cent of Chinese pension investments' net value can be allocated to stocks, while the cap for bonds is 135 per cent. While that means the funds can theoretically inject 600 billion yuan into shares - compared with the Shanghai market's 25.9 trillion yuan size - CICC estimates that purchases this year will be limited to about 100 billion yuan.
Unlike the National Social Security Fund, pension funds can only invest domestically.
Giving the NCSSF more ammunition may serve one more purpose: helping stabilise markets during the next rout. During last year's tumble, policy makers armed state-run investing company China Securities Finance Corp with more than US$480 billion to try and limit declines.
"Their mandate is to make a return and make sure the fund doesn't have a deficit," said Mr Hong. "But in times of crisis when they're called upon by the state, I think it will be difficult to refuse the request."