One of the more troubling stories to hit the tape last week was that despite, or rather due to, roughly $100 billion in losses in the past 5 quarters, Japan’s gargantuan $1.4 trillion state pension fund, the GPIF, which has desperately been selling Japan’s best performing asset – Japanese Government Bonds – in order to buy local stocks and the Nikkei at its decade highs only to see its equity investment plunge, is now forced to buy even more stocks, i.e. double down, as part of a ridiculous rebalancing which will lead to even more losses.
Japan is not alone.
After China did everything to prop up its own stock market, including arresting hedge funders, sellers, “rumormongers”, halting short selling, eliminating futures trading, and ultimately culminating with the “Buttonwood SPV” in which the PBOC finally threw in the towel and admitted it was directly buying stocks, we now learn that Chinese pensioners are about to become unwitting stock funds.
As Bloomberg reports, “China’s pension funds are about to become stock investors.”
The country’s local retirement savings managers, which have about 2 trillion yuan ($300 billion) for investment, are handing over some of their cash to the National Council for Social Security Fund, which will oversee their investments in securities including equities. The organization will start deploying the cash in the second half, according to China International Capital Corp. and CIMB Securities.
For the rhetorical answer to the rhetorical question of “what can possibly go wrong” here is the one-title answer, also from Bloomberg:
Why is China – for whom social stability is absolutely paramount and thus gambling with people’s retirement funds is truly a foolish initiative – doing this? Simple: whereas in the US legions of clueless investors buy any and every stock mentioned by such “legends” of crony capitalism as Warren Buffet, in China it is the pension fund. To wit:
For the nation’s equity markets – which are dominated by retail investors and among the world’s worst performers this year – the state fund’s presence is even more valuable than its cash, said Hao Hong, chief China strategist at Bocom International Holdings Co. The NCSSF has “such a good reputation in being a value investor that if they take the lead, the signaling effect is actually quite strong,” said Hong, who had predicted the start and peak of China’s equity boom last year. “It’s almost like Warren Buffett saying he is buying a stock.”
China’s “Warren Buffett” may be about to have a very rude awakening. According to Bloomberg, China’s NCSSF, which oversees 1.5 trillion yuan in reserves for China’s social security system, has returned an average 8.8% a year since 2000, the Securities Daily reported earlier this year, citing official data. Truly a remarkable number, and one which is alas just too good to be true when one considers that the larger pension system has been locally managed and made just 2.3% annually through 2014, the newspaper said. This also ignores China’s epic stock market wipe out in 2015.
Here is the official spin:
The organization’s entry will come as Shanghai stocks begin a gradual recovery that has pared their losses for the year to 16 percent from as much as 25 percent. While yuan depreciation concerns are pressuring Chinese assets lower, the economy is showing some signs of stabilizing. The nation’s foreign-exchange reserves unexpectedly climbed in June in a sign of slowing outflows, while a measure of services rose.
The entry “will be a positive event in terms of sentiment but the actual impact won’t be drastic,” said Ben Bei, an analyst at CIMB Securities in Hong Kong. “The fund will tend to be prudent and the progress may be very gradual — that is, it will enter the market over the next several years.”
The unofficial one is simpler: to boost confidence that China’s openly rigged and manipulated markets are once again safe:
Venturing into China’s volatile stock markets — where a crash erased $5 trillion of value last year — isn’t without its risks for funds traditionally focused on more stable assets. Japan’s government pension fund, the world’s largest, may have lost about $43 billion in the second quarter, Morgan Stanley MUFG Securities Co. estimated. This adds fuel to criticism over the Government Pension Investment Fund’s decision to boost equity allocations in 2014.
The problem, however, is that like in Japan and the rest of the world, pension funds simply have no choice than to swing for the fences when it comes to returns. Especially in China.
Low returns are a challenge for China’s pension system, which is already facing pressure from a rapidly aging population. The country’s old-age dependency ratio — a measure of those 65 or over per 100 people of working age — is set to triple to 39 by 2050. The NCSSF didn’t respond to an e-mail seeking comment. The pension funds are more likely to buy blue-chip firms, said CIMB’s Bei, while Bocom’s Hong said they’ll probably seek out shares of state-owned enterprises with low valuations. With the market down for the year, the timing is right for entry, said Hong.
The only silver lining on this latest foray into risk assets by a pension fund is that the exposure will be capped. Up to 30% of Chinese pension investments’ net value can be allocated to stocks, while the cap for bonds is 135 percent. While that means the funds can theoretically inject 600 billion yuan into shares – compared with the Shanghai market’s 25.9 trillion yuan size – CICC estimates that purchases this year will be limited to about 100 billion yuan. This means less than $20 billion in buying power: hardly impactful at all to push stocks much higher.
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But the real reason why this latest $300 billion in stock buying “dry powder” is being activated can be summarized in just two words: plunge protection. Bloomberg explains:
Giving the NCSSF more ammunition may serve one more purpose: helping stabilize markets during the next rout. During last year’s tumble, policy makers armed state-run investing company China Securities Finance Corp. with more than $480 billion to try and limit declines. “Their mandate is to make a return and make sure the fund doesn’t have a deficit,” said Hong. “But in times of crisis when they’re called upon by the state, I think it will be difficult to refuse the request.”
Too bad China does not know how to use HFTs like Citadel who, in collaboration with entities like the NY Fed, unleash massive upside momentum on very little capital to prevent market routs as has been the case in the US at every major inflection point during the past 7 years. That China has not yet gotten to the most modern method of market manipulation – with or without the Fed’s blessing – is troubling and suggests that at least one more major round of pain is in store for Chinese stocks.
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