Some Chinese officials are pushing for a system that would allow local governments to take some of the nearly two trillion yuan ($317 billion) socked away in pension funds and invest in domestic stocks, according to people familiar with the matter.
The effort comes as the authorities continue to look for ways to boost returns on capital sloshing around the world's No. 2 economy.
China's securities watchdog and other government agencies have discussed a proposal that would involve setting up a new entity similar to the country's National Social Security Fund, these people said. That fund would invest a portion of the money in the domestic stock markets on behalf of local governments, which oversee pension funds that are expected to total about two trillion yuan by year-end, the people said.
Currently, local pension funds can park their money only in low-yielding instruments such as bank deposits and government bonds.
Such a plan would mark another significant step by China toward developing its still-nascent capital markets as it moves toward facilitating more capital flows across the border—a key condition for its ambition of turning the yuan into a global currency. It could also help underpin Chinese stocks: Shanghai's main benchmark is down by about one-fifth so far this year over concerns that domestic economic growth is slowing.
It's unclear how such a fund would be structured or whether it would gain the approval of China's top leaders. Proponents will likely face skepticism because China's stock markets have been plagued by irregularities among listed companies, which could put pensioners' interests at risk, and because returns in the stock market aren't guaranteed and pensions could lose money.
The plan would need approval from the State Council, China's cabinet, the people said.
China started to overhaul its national pension system in the late 1990s amid concerns over a rapidly aging population, and put in place a system under which pensions are largely managed at the local level. Funding and terms depend on the location, but they are funded by a mix of public money and contributions from employers and employees. Such funds are separate from the National Social Security Fund, which was set up in 2000 with funding mainly coming the central government.
Now, a lack of asset-management expertise among local governments has added to worries about potential funding shortfalls down the road, leading to calls for an asset-management fund that could invest the assets on their behalf, the people with knowledge of the matter said.
Also of concern is the potential for local pensions to be misused by corrupt officials, the people said. A widely publicized corruption case in 2006 involved the dismissal of the then-Shanghai party secretary, Chen Liangyu, for alleged misuse of money in the city's social security fund. He was convicted of taking bribes and embezzling public funds.
Some Chinese regulators have endorsed the idea of forming an entity like the National Social Security Fund to manage local pensions.
"We need to consider how to aggregate all the local pensions currently scattered around different provinces and set up or entrust a specific entity" to invest the funds, said Guo Shuqing, chairman of the China Securities Regulatory Commission, China's securities watchdog, at an economic forum last week.
Mr. Guo pointed to the National Social Security Fund as an example, noting that the fund, whose investments range from Chinese stocks and bonds to foreign equities, has generated annualized returns of 9.17% since its launch a decade ago.
Dai Xianglong, a former central-bank governor who now heads the National Social Security Fund, said in a speech posted on the fund's website Tuesday that certain government agencies are considering aggregating some basic pension funds currently managed by provincial and municipal governments and then investing some of the funds in financial assets like stocks.
"It's the right move, and we're supportive of that," Mr. Dai said.
Allowing local pensions to buy stocks could help add liquidity and credibility to China's stock market, which has been populated with individual investors and rife with insider trading, analysts say. It could also help boost the sagging fortunes of the mainland market, which has taken a beating this year on worries about China's economic growth.
Still, some analysts questioned how fast the plan would be put together. Merging China's local pension funds into a coherent investment vehicle is "a major problem," analysts at North Square Blue Oak, a London-based institutional broker, wrote in a research note.
"While there are many suggestions on how to invest pensions into the stock market, a major increase outside of the [National Social Security Fund] cannot be achieved until this issue is resolved," the analysts said.
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