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China will allow its massive pension fund to buy stocks to support the shaky market

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Chinese policymakers, fresh from watching the nation’s stock market slump more than 20% in the past two weeks, are calling in the cavalry to support the market.

According to a report from Bloomberg policymakers “will allow its basic endowment pension fund to invest in stock markets, according to draft regulations posted on the Ministry of Finance’s website”.

The fund also will be allowed to invest in domestic bonds, stock funds, private equities, stock-index futures and treasury futures, according to the draft statement posted by the government.

A rapid run-up in stock prices over the past year, something that propelled major Chinese indices to gains in excess of 140%, has unravelled in recent weeks as investors, many of them leveraged, were forced to sell down their positions on the back of steep intraday losses.

Last weekend China’s central bank, the PBOC, looked to support markets by delivering a 0.25% cut to benchmark one-year interest rates along with lowering the reserve ratio requirement for some institutions by 0.5%.

Going off the price action seen yesterday, those moves have failed to calm investor nerves. The benchmark Shanghai Composite index fell by 3.3%, following a 7.4% loss on Friday, with the daily points range the largest seen in the history of the index. It was also the largest daily percentage range since February 20, 1997.

According to Wen Bin, a researcher at China Minsheng Banking Corporation in Beijing, the move to allow the pension fund to increase its exposure to the stock market will help stabilise the volatility in stocks.

“The access of the pension fund as a long-term investor will remarkably increase liquidity supply and will benefit the sustainable, healthy development of the stock market. The Chinese market will be stabilized by the policy”.

Will he be right, or will the carnage continue unabated? We’ll find out when trade opens.

You can read more here.

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