New welfare stock accounts much ado about nothing

China's social security fund opened 16 new A-share accounts last month, the first time it has created new accounts in seven months, according to figures released by China Securities Depository and Clearing Corp Ltd.

The move has been interpreted by some media and analysts as a sign that the country's gloomy stock market is on track for a rebound. They reason that the new accounts will serve as channels for capital inflows into the market, which will give a lift to stock prices. Moreover, social security funds, among other large institutional investors, are known for their prudence and would be unlikely to enter a market without being confident in its future performance. Historical records seem to support this conclusion - in January 2009, China's social security fund opened new stock accounts at a time when most investors had dismissed the equity market, and soon after reaped the benefits of a bullish recovery.

Although the expanded role of the social security fund at the nation's bourses has excited many market watchers, the ultimate impact of this new development is likely to be limited.

First of all, a sustained oversupply in the stock market has exerted strong downward pressure on share prices. In recent years, China has led the world both in terms of IPO launches as well as the amount these listings have raised. Currently, the total market value of China's A-shares has reached 18 trillion yuan ($2.83 trillion), even as investors continue to pull their capital from the market. In comparison, the 20 billion yuan in the social security fund is hardly a drop in the bucket and far too small to solve the supply-over-demand dilemma.

Also, with investor confidence shaken by the current global economic climate, demand for equities is unlikely to pick up anytime soon. China's GDP growth fell for the fifth straight quarter in the first three months of this year and will likely slide further in the second quarter, according to the National Bureau of Statistics. Meanwhile, roughly 40 percent of listed companies turned a profit in 2011, down 40 percent year-on-year, according to their financial reports.

As economic conditions remain bleak, it's unreasonable to expect one positive news item to turn around the market; especially after a raft of recent policy moves aimed at the exchanges - including lower commission fees as well as interest rate and reserve requirement ratio cuts - have failed to revive mainland stocks.

With sentiment so low, what the government really needs is another major stimulus package. As many will point out, the bull market of 2008-2009 was a direct result of the 4 trillion yuan investment plan the government rolled out, not the actions of the country's social security fund. Actually, the mainland stock indices have been steadily creeping downward since September 2011, when China's social security fund also opened 16 new accounts.

More likely than not, the social welfare fund opened new accounts this time merely as a way to diversify its portfolio and respond to the government's call for more institutional investors to engage in stock trading, not because of any great faith in the market.