The implementation of a private pension program nationwide will serve as an important driver for the increased maturity of Chinese capital markets, but there is still room for it to attract more users with a willingness to open accounts and invest, said experts.
According to a notice jointly released by five central government departments, including the Ministry of Human Resources and Social Security, the Ministry of Finance and the State Taxation Administration, the private pension program began to be fully implemented across the country from Dec 15.
Under the plan, all Chinese employees covered by the country's basic pension insurance system — also called the first pillar — can voluntarily open private pension accounts at designated commercial banks.
Data from the Ministry of Human Resources and Social Security suggest that more than 1 billion Chinese could be eligible for the program.
Individuals can deposit a maximum of 12,000 yuan ($1,645) every year into their private pension accounts. The deposit can be completed on a monthly or yearly basis.
"The nationwide implementation can be interpreted as the erection of a third pillar in China's pension system in the real sense. It is an important step forward in the construction of a multilayered pension system in the country," said Dong Keyong, a professor at the School of Public Administration and Policy of Renmin University of China.
In November 2022, the private pension program experiment started in 36 major cities such as Beijing, Shanghai, Guangzhou, Guangdong province, and Xi'an, Shaanxi province.
According to data from the Ministry of Human Resources and Social Security, 72.79 million Chinese had opened their private pension accounts by end-November.
A major achievement of the private pension pilot program over the past two years has been to educate people on the account's function as financial preparedness for people during their old age, said Jin Weigang, deputy director of the China Association of Social Security.
More importantly, the program will significantly aid in the further maturity of the Chinese capital market, according to industry mavens.
Based on international experiences, pensions, as a long-term capital, serve as the cornerstone of a stable and sound stock market, said Wan Li, a financial industry analyst at BOCOM International.
As more people open accounts and deposit money, private pensions are likely to become an important incremental capital inflow into the A-share market. Such capital usually focuses on long-term investments, which is conducive to the sustainable development of the Chinese stock market, she added.
CITIC Securities has calculated that the value of China's private pension market will rise to 12 trillion yuan by 2035, by which time 40 percent of the capital will be directed to investments in equities, up from 20 percent at present. This substantial increase will significantly boost capital market vitality, said experts from CITIC Securities.
Zheng Zheng, a portfolio manager at asset management firm Bosera Funds, said the full implementation of the program is a "milestone" in the Chinese capital market as it will stimulate more financial product innovation.
The investable scope under private pension accounts has been expanded upon full implementation of the private pension mechanism, and it is "a major highlight", said Yan Zhipeng, a professor from Shanghai Advanced Institute of Finance at Shanghai Jiao Tong University.
Savings deposits, wealth management products, commercial pension insurance and mutual fund products used to be open for investment for private pension accounts. Following the latest full implementation, treasury bonds and designated pension deposits have now also been included.
According to Yan, these two newly added financial products incur little credit risk. Their asset prices are more stable, which can address the financial security concerns of retirees, he said.
Yan further said that the bond ladder strategy is widely adopted for pension investments. It is a diversification technique that involves investing in bonds with staggered maturity dates. This strategy can reduce risks by spreading investments across different bonds and provides a predictable source of retirement income.
"For example, an individual can divide 100,000 yuan of deposit into five equal parts. The first 20,000 yuan can be invested in bonds or savings products that mature in one year, and the second 20,000 yuan can be invested in those with a two-year maturity, and so on," he said.
"This will secure a safe and stable cash flow every year in the following five years. Treasury bonds are suitable for such an investment strategy," he added.
Index funds have also been included as an investable product under private pension accounts, according to the notice released in mid-December.
Instead of investing in a single stock, index funds focus on a part or all constituents of one index, which can help individual investors alleviate risks and make investment decisions, said Dong of Renmin University of China.
京公网安备 11010202009201号