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Monday, 28 January, 2002, 11:10 GMT
China's stock markets plunge
Chinese trader
Stock markets are down more than 17% in January
China's stock markets plunged on Monday after the regulator said it was considering restarting the sale of huge state holdings in listed companies.

The share sell-off is part of plans to fund a new welfare system in which Chinese workers will have individual pension plans.

There's a certain amount of lack of trust in this new pension system

The process was halted in October, leaving pension reform in limbo.

But the statement over the weekend by the China Securities Regulatory Commission (CSRC) has confirmed market rumours that sales of state holdings were about to begin again.

All change

Before market reforms, workers had no need to contribute to a pension fund.

Man on overloaded tricyle
Unemployed workers are most vulnerable

Instead, health and welfare needs were met by their work unit which paid retired workers about 75% of their previous salary as a pension.

But the need to streamline state enterprises to compete with foreign firms has led to the end of the "iron rice bowl" under which work units pledged to provide full welfare for their staff.

The CSRC said it was considering reintroducing the sell-off of state shareholdings, though at a slower pace, with only firms listed for 10 years being required to participate in a bid to avoid a repeat of last summer's market falls.

The move comes ahead of a top-level policy-making meeting on financial services reform, due to start of 5 February.

'Hopelessly under-funded'

The Chinese authorities face a pressing problem: how to provide for an estimated 400 million pensioners by 2050.

The reformed pension system is "hopelessly under-funded", one British sociologist studying social security reform in China told BBC News Online.

"Theoretically, everyone has a pension plan but in reality a lot of that money is being used to pay for pensions now... it's raiding future pensions to pay for present pensions," said the researcher, who did not wish to be named.

The state share sell-down is the most sensitive topic in the markets

Elaine Wu, analyst

Both Shanghai's A-share and B-share indexes have fallen more than 17% this month on fears that the share sales would resume, flooding the market with liquidity and bringing down prices across the board.

Shanghai's index of US dollar-denominated B-shares has fallen more than 40% below the peak reached in May 2001, before sales of state holdings began.

Nervous investors

"The state share sell-down is the most sensitive topic in the markets. Whenever there is some news on it, investors immediately become nervous and sell stocks," said Elaine Wu of China Southern Securities.

Meanwhile, many ordinary Chinese fear the welfare reforms will not provide them with a pension.

'Lack of trust'

"There's a certain amount of lack of trust in this new pension system," the sociologist said.

"People say: 'We're contributing now but are we actually going to get our pension in 20 years?'"

Workers - such as those laid off by state-firms - who move into the growing private sector are particularly vulnerable to exclusion from a scheme that is supposed to cover everyone.

In some cases, the researcher said, "even if they've just asked their employer about contributing to a pension scheme, they've been sacked the next day."

Shanghai's B-share index closed down 7.95% on Monday on fears of the sell-off, at 126.230, while the Shenzhen B-share index slid 8.72%.

"Investors trimmed their holdings as they seem to be giving up hope on the market outlook because more and more cheap stocks are expected to hit the markets," said Luo Yanxin, an analyst at China Southern Securities.

See also:

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