China to launch new 401K-style pension plan

Tax-deferred pension plan set for January 2014

SHANGHAI (REUTERS) — China will launch a 401K-style tax-deferred pension investment scheme in January 2014, potentially boosting stock and bond market performance as new funds enter China's capital markets.

The policy will allow employees to set aside a tax-deferred portion of their salaries for investment in pension funds, improving returns on investment for Chinese savers and at the same time supporting wider market liberalisations.

State media reported the new policy on Monday morning, citing a statement on the Ministry of Finance website dated Dec. 6, jointly issued with the Ministry of Taxation and the Ministry of Human Resources and Social Security.

Chinese stock investors have been eagerly awaiting the liberalisation of pension fund investment rules, which currently lock most state-run pension funds into highly secure but low-yielding government bonds.

A research note by Hua Chuang Securities said the new policy could potentially pour a fresh 300 billion yuan ($49 billion) per year into China's fund management industry, adding that current participation in annuity schemes in China is very low.

Chinese equities markets opened up slightly on Monday morning. Domestic investors are still concerned that the resumption of initial public offerings IPOs set to start in January will have a net dilutive effect on valuations.

The logic is that if no new money enters the stock market, more company listings can only cannibalise capital from other company shares, driving down prices.

Appearing to understand this concern, regulators have accompanied announcements about the IPO resumption with suggestions that other policies will be implemented to offset the dilutive impact, including the issuance of preferred share schemes and the potential injection of fresh capital from pension funds.

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