On June 19, regulators issued a notice ordering that 10 percent of state-owned stocks in companies listed after the 2005-2006 shareholding reform be transferred to the Social Security Fund free of charge. The policy covers 131 domestic companies, involving 8.4 billion shares worth around 64 billion yuan ($9 billion) in terms of their IPO (initial public offering) prices. Stakeholders that fail to meet the 10-percent ratio must transfer all their state-owned shares to the fund.

In addition, all transferred stocks will be subject to a three-year lock-up on top of any pre-existing sale restrictions. But the fund will not exert influence on corporate management, said the notice.

The policy, which also applies to future listings, was jointly announced by the Ministry of Finance, the State-owned Assets Supervision and Administration Commission of the State Council, the China Securities Regulatory Commission (CSRC) and the National Council for the Social Security Fund.

Analysts say regulators still need to clarify the details of the new policy and ensure its proper enforcement, which will directly dictate how effectively it translates into real benefits. The Ministry of Finance recently said in a statement that it would study the question and give an answer in the next few weeks.

Whatever the answer is, there is no doubt that the Social Security Fund will be the biggest beneficiary of the share transfer. As a national strategic reserve, the fund was established in August 2000 to meet the future pension needs of an aging population. For years, the fund has obtained money from the Central Government, sales of lottery tickets and returns on investments. Because of a similar absorption of state-owned stocks listed on the Hong Kong H-share market in 2005, it has become the largest institutional investor in Hong Kong. But as the aging process picks up pace, the fund is increasingly finding itself under greater financial pressure. The stock market collapse last year intensified the shortfall.

Guo Tianyong, a banking professor at the Central University of Finance and Economics, told Beijing Review that the state-owned share transfer could put the fund in a better financial position to prepare the country for an aging population.

More importantly, the share transfer can play a significant role in alleviating the oversupply pressure and shoring up the stock markets before the resumption of IPOs, Guo added.

A market stabilizer

Under shareholding reform years ago, China mandated a freeze on a large number of state-owned stocks after their IPOs, prohibiting their sale until a specified time. This was aimed at clamping down on frequent changes in the holdings of state-owned enterprises that could have hamstrung the way their businesses operated, and preventing a flood of new shares from depressing the prices.

But now the lock-up is coming to an end, making a large number of state-owned shares eligible for sale. Given the sharp run-up in prices, many shareholders face a great temptation to cash out of their holdings, sparking fears of a sell-off.

In recent years the ailment has been hanging over the stock markets like the Sword of Damocles. Although most state shareholders have largely held off from an arbitrage play in order to calm down the panic, sales by numerous small shareholders and skittish investor sentiment have dealt a blow to the fledgling markets. The case of China Pacific Insurance (Group) Co. Ltd. shows how overwhelming the shock can be. In the three trading days before December 25, 2008, when billions of its restricted shares were released, their price on the Shanghai A-share market nosedived by 14 percent.

Recognizing the pitfalls of excessive share supply, regulators did not stand aside and let the market find equilibrium on its own. In April 2008, the CSRC ordered that any sale of unfrozen shares in a one-month period making up more than 1 percent of a public firm's total stocks go through a separate block-trading system. Before that, the CSRC required shareholders to file a statement two trading days before seeking to sell more than 5 percent of a listed firm's shares within six months after their release.

But those measures appear not to have provided an effective cushion against market volatility. The Shanghai Composite Index has gained more than 50 percent to reach nearly 3,000 points this year after sinking to a low of 1,680 points last November. Such wild swings have raised concerns about the vulnerability of unsophisticated investors during the sweeping process of share liberalization.

In fact, the Social Security Fund has acted as a stabilizing force in the stock markets. It capped its gains and chose to exit at the end of 2007, when investment euphoria had reached its peak. It started to build up its positions in May 2008 when the mood turned somber. The optimal market timing has provided a floor under its investment performance. According to its yearly report, the fund's annual profit ratio from 2000 to 2008 averaged nearly 9 percent, in spite of a stock meltdown last year.

The policy comes as a long-anticipated boon to sustain the upward momentum, said Guo.

"Of course there is no absolute guarantee that the Social Security Fund will not dump the stocks after their extended lock-up expires," said Guo. "But surely it will adhere to holdings in the solid companies that offer a good level of earnings visibility."

Tang Min, Deputy Secretary General of the China Development Research Foundation, echoed Guo's opinion, saying that the impact would be more psychological. At the very least, it is bound to strengthen investor confidence that a prolonged market rebound is under way, he said in an interview with Beijing Business Today.

More important, analysts say the share transfer is part of a government effort to pay for the resumption of IPOs. Regulators have cautiously reopened the door to new share listings after a nearly yearlong freeze. The Yunnan Province-based medicine company Guilin Sanjin Pharmaceutical Co. Ltd. is the first to seek financing through the stock market. But worries have been proliferating that pressure on liquidity might rock the foundations of market recovery.

"The share transfer is in part intended to clear away investor jitters about the return of IPOs," said Li Daxiao, a senior analyst with Yingda Securities Co. Ltd. "Since numerous new shares are pouring in, it is necessary to firm up the market by taking some out."

For a relatively nascent market more or less steered by sentiment, the share transfer is a powerful incentive for its long-term prospects, he added.