Pension funds one solution to inflation fears
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The People's Bank of China (PBC) has just raised the reserve requirement ratio, the minimal amount each bank must hold proportional to its lending, by 0.5 percentage points.
This is the fifth such hike this year, which has pushed the reserve requirement ratio for China's big commercial banks up to 21 percent, a historic high.
But this has done little to curb public fears about inflation.
Recently I've found that ordinary people, from all walks of life, are worried that the money they saved could soon be devalued. It's one reason for the speculation boom in China, particularly in real estate, but reaching into everything from mines to bean sprouts.
In a fast growing economy, inflation is an unavoidable nightmare.
However, if there is no effective way to deal with the inflation, it will threaten the social stability and the goal of building a harmonious society.
As well as adjusting monetary policy, equity investment is another way to fight inflation.
Looking at the statistics for 401K plans (personal pension system) in the US between 1984 and 2008, the correlation coefficient between the average remaining money in every American's 401K account and the closing level of the Dow Jones index in those years was as high as 98 percent.
So the US pension system completely relies on the development of domestic capital markets.
Ordinary people in the US participate in the domestic capital markets to fight against inflation. And in the meantime, dependent on the steady financial support from the pension system, the US capital markets prosper. The two sides form an excellent mutual relationship.
The system has two common characteristics. One is that if you put $1,000 into your pension account, your company will match that amount. That means the more you invest, the more you get.
The second one is a whole series of preferential tax policies, especially the policy of delaying tax to encourage using pensions fund to invest, but penalizes withdrawal from these accounts for those retiring before 60.
Under these two policies, the US public have become long-term investors in the domestic capital markets through the pension system.
