The decision to allow the state pension fund to invest in stocks came after a series of falls in the value of the main Shanghai Composite Index. However the decision was not able to halt a fall of 8.49% yesterday and a further 7.65% decline in trading today.
Growth in China has been downgraded for 2015 by organisations including the International Monetary Fund as the country attempts to boost domestic demand and move away from growth dependent on exports.
After the country’s authorities took action to weaken its currency earlier this month, markets fell further amid fears the country’s expansion may slow more than expected.
Chinese state news agency Xinhua said that the fall on Monday was the worst day in the markets since the financial crisis of 2007, and had wiped out most of the gains made in 2015 so far.
The impact of the additional freedoms granted to state pension fund investors is not yet clear. The fund is worth an estimated 3.5 trillion yuan ($550bn), and has been given permission to invest a maximum of 30% of net assets in stocks and equities.
However, it was unknown how much the sector will decide to invest, Xinhua said.
Yesterday’s large fall in Chinese markets led to large falls in other markets, heightening concerns of a global slowdown. The FTSE 100 index in London fell by 4.7% yesterday, while the S&P 500 and Nasdaq in the US were also down 10% on recent peaks. But these benchmark indices have gone up in early trading on Tuesday after The People’s Bank of China announced a cut in interest rates by 0.25 percentage points to 4.6% in an effort to stimulate economic activity.
Analysing the recent falls, credit ratings agency Standard and Poor’s said China’s economic activity appeared to have fallen to the lower end of the range witnessed over the last decade. It was therefore right to be concerned despite the government's reputation for managing growth.
“These concerns are particularly disconcerting considering government efforts to transition activity away from a manufacturing-based economy and toward a service and consumption-based model, which appears to be losing traction judging by the trend in retail sales,” it added.