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

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.

(Related: Jack Ma-Backed Yunfeng to Buy MassMutual Unit for $1.7 Billion)

“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% 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% of comparable non-pension funds.