There's $100 billion getting ready to charge back into the Chinese stock market

Here’s another reason to expect a Chinese stock market rally in the near future: China’s pension fund is getting back in the game and bringing $100 billion with it.

This totals 90% of the country’s social security pool, and the news is China’s state media.

Think of it this way: There are two contradictory stories going on in China right now. One is about the very indebted corporate sector and the need for government reform ASAP.

The other is about the stock markets on which many of those companies are traded. Right now, people are talking about a rally on the way after two death drops this summer, and a dismal start to 2016.

Of course, this could only have happened if the government was giving the ‘all clear’ after more than half a year of turmoil. It’s even handing out set guidelines about how the money should be invested.

“Detailed guidelines about how the investments will be conducted are expected shortly andthe investments will be made through commissioned institutional investors,” Yin Weimin, the minister of Human Resources and Social Security, told the People’s Daily.

This is the second major signal we’ve gotten from the government that it’s time to get back into Chinese stocks. Earlier this month, the government loosened restrictions on margin trading.

Hey man, it’s your paradox

Consider this a shift in where investable money is going in China across the board. After the stock market crashed last summer, money rushed into corporate bonds. That, in turn, helped finance debt laden companies, — some of which have gone into full zombie mode, spending all their revenue on paying down debt rather than turning a profit.

This is a situation that still stands to get worse before it gets better. The government admits that it has a lot of restructuring to do. It has already announced that 5-6 million people stand to get laid off in the coal and steel industry over the next couple of years. Reform is a process that’s in its infancy.

That doesn’t sound like the right environment for a stock market rally, but that’s not really the point here.

This is part of the paradox that comes with investing in China in general. China’s A-Share ETF — The Deutsche X-trackers Harvest CSI 300 — actually fell 0.3% to $23.86 after investors put $63.8 million in it last week. You would think that would call for a celebration, not a yawn.

That’s because all of the elements to get the market humming have not come together quite yet. The pension fund, for example, is going to put its money back into the market gradually.

In other words, the government hasn’t really fired the gun to set everyone off to the races. What we’re seeing right now is all the runners getting on their marks and getting set.

You’ll be able to tell when the government says “go!”

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