China's Boom or Bust Market Tempered by 401(k)-Style Funds

  • Retirement option proposal could help reduce market volatility
  • Plan may also boost China’s burgeoning asset-management sector

Pedestrians in the Lujiazui district of Shanghai.

Photographer: Qilai Shen/Bloomberg

China’s plan to give its citizens additional 401(k)-style savings options could help the nation’s securities regulator achieve one of its most important goals: a more stable stock market.

The government’s proposals for new retirement products, outlined in a briefing last week, would encourage China’s 131 million individual investors to put more money in long-term funds. The products would offer discounted fees and be subject to a minimum lock-up of one year.

While convincing China’s trigger-happy stock investors to adopt a buy-and-hold approach won’t be easy, a larger pool of long-term funds could temper booms and busts in the $7.8 trillion market. Smaller swings would allow authorities to reduce market intervention, which has stabilized Chinese shares after a 2015 crash but undermined the government’s pledge to boost the role of market forces.

“This means an additional source of long-term money,” said Yang Delong, Hong Kong-based chief economist at First Seafront Fund Management Co. “That’s favorable for maintaining stock market stability.”

Most savers in China currently get their exposure to equities by opening a brokerage account and trading on their own. Individual investors make up at least 80 percent of share volume in China, which has at times left the market vulnerable to herd behavior. In the U.S., two-thirds of publicly-traded stocks are held by institutions.

Asset-Management Boost

While China’s asset-management industry has expanded rapidly in recent years, retirement products are still scarce relative to developed markets. Chinese workers make mandatory contributions to a national pension fund, and the government has launched an annuity savings plan, but most savers tend to gravitate toward shorter-term stock investments, wealth management products or real estate.

On Nov. 3, the China Securities Regulatory Commission unveiled proposals to encourage retirement investments with a fund-of-funds structure and either a target-date or target-risk strategy. The offerings would have a lock-up period of at least one year, a three-year track record of beating their benchmarks and minimum assets of 300 million yuan ($45 million), the regulator said. Fees would be less than 60 percent of comparable non-pension funds. 

The plan, modeled in part on America’s 401(k) system, is open for public review until Nov. 18. While the draft rules didn’t mention arrangements on tax, the government said in June it would fast-track a trial on tax-deferred commercial pension insurance offerings.

The proposal will “push forward market reform of the pension system and the long-term and healthy development of the mutual fund industry,” the CSRC said in a statement.

Authorities have been looking at ways to reform China’s pension system as the nation’s population ages. The ratio of workers versus retirees will drop to 1.3-to-1 in 2050 from 2.8-to-1 this year, putting pressure on the national pension fund, according to official figures.

The CSRC’s plan could boost China’s asset-management industry, which is already set to expand five-fold to $17 trillion by 2030, according to a recent report by Casey Quirk. Foreign money managers may also benefit, said Allen Kuo, Shanghai-based head of secondary markets at Gopher Asset Management.

“If you manage a fund with a 30-year horizon and various risk-return objectives at different stages, you will have to diversify globally,” Kuo said.

Still, it remains to be seen how much money Chinese retirement funds would send offshore. Money managers who want to buy foreign securities need to obtain a quota under the Qualified Domestic Institutional Investor program, which caps the amount of funds that can leave the country.

— With assistance by Gary Gao, and Amanda Wang

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