The social security fund has received permission to open multiple securities accounts, indicating that it should not be long before the social security fund is trading on the stock market through its management companies. According to the relevant security account management regulations, one ‘natural person’ or ‘corporate person’ may open only one securities account of the same category and purpose. However, according to the Provisional Regulations on the Management of Social Security Fund Investment, the assets entrusted to a single social security investment manager should not exceed 20% of the total assets entrusted in the year.

If calculated according to more than RMB80 billion at the end of 2009, the social security fund has to entrust its assets to at least five management companies. In other words, the social security fund has to open at least five accounts in order to trade on the market. The two sets of regulations have, therefore, put the social security fund in a catch-22 situation. It is obviously not feasible for the social security fund to open only one securities account. Permission for the social security fund now to open multiple securities accounts through fund management companies means that the practical problem has disappeared and there is no other legal barrier for social security fund to trade on the market.

For China, trading by the social security fund is a requirement of the efforts to restructure social security fund investment. The 2009 annual report by the national social security fund shows that by the end of last year, the total fund had reached RMB80 billion, including RMB26.42 billion of treasury bonds (32.82%) and RMB51.999 billion bank deposits (64.59%), RMB1.27 billion of Sinopec new shares (1.57%), RMB100 million of corporate bonds (0.74%) and RMB500 million of financial bonds (0.28%), with the interest payable amounting to RMB224 million. Such a structure is unfavorable for increasing value. The yield in 2009 was only 2.25%, about the same as the bank interest for a year.

The provisional regulations on the management of social security fund investment also demand the restructuring of the fund. The regulations provide that the funds used on the stock market may reach as high as 40%, but the proportion is, currently, only 1.57%. The regulations, which have provisions concentrating mainly on bank deposits and state treasury bonds, cannot meet the requirements for social security payments.

A recent survey by the Shenzhen Securities Association shows that under the dual influence of flat market conditions and downward adjustment of commission, the commission of all securities departments dropped by 30% on average. If no major improvements are made in the situation, all the securities departments would be thrown into the red for the first time since 1995. The same is true with Shanghai’s securities organizations. It would also affect the growth of stamp duty. Statistics show that the securities market raised RMB53 billion of funds in the first eight months of this year, 47.37 % less than in the same period of last year. 66 companies issued A-shares, 25% less than in the same period last year. Investors paid stamp duty amounting to RMB8.75 billion, 62.68% less than in the same period of last year. To reverse the situation, a bullish market would be needed.

Trading the social security fund is a good thing for the market, as it can increase the money supply to the market. If calculated according to the upper limit of stock holdings, which is 40% of the RMB80 billion of the social security fund, there would be more than RMB30 billion more money on the market, thus making it favorable to arrest the declining situation of the stock market, promote the rise of the fund-led market, increase the strength of institutional investors, change the composition of market investors and ultimately facilitate the long-term healthy development of the market.

Although people have placed high hopes on the social security fund, it plunged into loss the first time it tested the water. Recently Sinopec shares rationed to strategic investors did not yield any profit, instead incurring a loss of RMB231 million, indicating that the operational level is not high. Under these circumstances, the effect of trading the social security fund might be discounted. Although the social security fund is very careful and stringent when selecting managers, there is not much difference between all the fund management companies. Analysis shows that although they are divided to some extent in net value, they operate in the same way and the division is determined by the amount of shares they held at the beginning.

Although the main purpose of trading by the social security fund is to preserve its value, it should not be the only objective – it should also strive to add value. As stock markets have recently shown, growth is not always guaranteed. Placing the social security fund in the hands of the market may mean that in future years there will be no fund left to meet the needs of the Chinese people.