China is starting to get the idea. After putting a halt to falling stocks, then buying them via its sovereign wealth funds and even attempting to regulate for safety, changes are afoot that may finally see the nation's markets mature.
According to China International Capital Corp., the country's pension funds may invest about 100 billion yuan ($15 billion) in domestic stocks this year as they hand over some of their money to the National Council for Social Security Fund. This could inject a good deal of institutional chutzpah into a market plagued by excessive participation of individual investors and perhaps start a virtuous cycle of allowing professionals to manage retirement savings.
Statistics on the make-up of trade in Chinese markets are scant, but the general understanding is that about 80 percent is your average Joe, or Zhang, rather than portfolio managers who are paid to analyze companies and trends. Even last year's crash wasn't enough to abate the common man's growing love of A-shares: Stock-trading accounts increased 51 percent in 2015.
The good news is that such interest has driven liquidity through the roof as well. Daily average securities turnover has risen to as much as 10 times the amount seen just five years ago. In June 2015, volumes totaled a record 47.2 trillion yuan, almost five times that of New York Stock Exchange group companies the same month.
Now there is liquidity, the only thing that's missing is value investors, which tend to be funds. The number of investment portfolios has grown steadily in China but is still a far cry from other large markets. According to the China Securities Regulatory Commission, there were 2,724 publicly traded securities funds at the end of December. The U.S. had 16,660 investment companies by the time 2014 drew to a close.
In North America, one of the main drivers for the existence of so many funds is the deep pool of retirement assets, and the fact most are managed by third-party professionals. Such people tend to jump in when a market sells off because it unlocks long-term gain opportunities, whereas most retail investors tend to panic. By outsourcing the management of its pension funds -- even within the family -- China could be paving the way for more money to end up under the supervision of specialists.
That may lead Chinese stocks to behave in a more mature way, and even allow for a better shot in MSCI's next global index inclusion review. If there were more big, institutional players, and more money was professionally managed, there might be no need for trading halts and other gimmicks that have turned so many global players off Shanghai.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
To contact the author of this story:
Christopher Langner in Singapore at email@example.com
To contact the editor responsible for this story:
Katrina Nicholas at firstname.lastname@example.org