CHINESE stock investors are abuzz with talk about the "401(K) project" that could bring US-style retirement savings accounts to China and boost the sagging fortunes of the stock market.

Shang Fulin, president of the China Securities Regulatory Commission, has been promoting the idea since 2004.

In the United States, employees are allowed to deposit part of their earnings in such accounts and not pay income tax on the money until it is withdrawn at retirement.

Interest earned on money in a 401(k) account is not taxed while it remains there. Sometimes employers match the contributions of employees. The money is typically invested by fund managers, with employees getting a marginal say in what kinds of investment they prefer: stocks, bonds, money markets or some combination.

In China, pensions work like this. It is compulsory under the current system for an employee to set up an individual pension account which both the employee and his or her employer have to make a monthly contribution to. The amount varies in different regions. The employee cannot withdraw any money from the account until he or she retires. Upon retirement, he or she receives a monthly stipend from the account.

Chinese securities officials who advocate a US-style system think more retirement savings will flow into markets if people are given the incentive to save more, boosting liquidity and prices.

Every government, of course, wants people to save more for their own retirement to reduce the burden on the public purse.

That's especially true in countries with aging populations, like China, where the proportion of younger, working people who will be paying for old-age care is shrinking.

China's pension fund right now sits just shy of 1.3 trillion yuan (US$203 billion), according to a July report by Zheng Bingwen, director of the world social security research center of the China Academy of Social Sciences.

A 2005 World Bank report estimated that the world's most populous country may see a shortfall of 9.15 trillion yuan in pension funds by 2075.

China's social security funds, including the pension fund, totaled nearly 2.5 trillion yuan by the end of last year, according to Securities Times. The paper also cited an unidentified source as saying that the country's pension fund alone may exceed 10 trillion yuan in 2020.

Advocates of China's 401(K) project claim that the country needs to figure out a way to cover the widening gap in pensions, and what better way to do that than funneling more money into retirement accounts and, in effect, more money into stocks, where returns have historically been higher than on ordinary bank accounts?

China's benchmark stock index, the Shanghai Composite Index, fell 14.3 percent last year and has dropped 8 percent this year. An influx of retirement money might just turn the bear into a bull, advocates hope.

But questions arise.

Will millions of people concerned about their old age be happy to see their money flowing into markets that have suffered much publicized losses and triggered suspicions about corrupt practices and insider dealing?

The idea of a Chinese-style 401(K) account is not really new. In 2004, China began what are called enterprise annuities, or supplementary pensions.

Equal share

Employers and employees pay an equal share of a fixed sum every year to the enterprise annuities and the money can only be withdrawn when the employee retires.

The enterprise annuity market is currently tightly regulated. The trustee, or the employer, must appoint an approved administrator, asset manager and custodian to manage the annuities.

Asset managers are subject to restrictions on investment policy as well. Up to 30 percent of the assets are now allowed to be invested in equities. The manager's fees are capped at 1.2 percent of plan assets and 20 percent of any fees levied must be retained as a reserve to cover any investment losses.

However, the annuities approach hasn't quite lived up to expectations.

By the end of last year, enterprise annuities in China totaled about 300 billion yuan, compared with 49.3 billion yuan when the system began seven years ago. Annuities were expected to grow to at least 1 trillion yuan by 2010.

Over 10 million people were covered by enterprise annuities in more than 30,000 participating companies at the end of last year, according to an August 15 article by Zheng in the China Securities Journal.

China's complicated tax system is a key reason for the low participation rate, Zheng explained. China requires people to pay tax on the earnings they put into annuities, eliminating a major incentive driving the US 401 (K) system, he said.

Although companies that participate in the Chinese system can get a 5 percent tax deduction on the money, there's no deduction for employees.

The CSRC can choose to launch another version of the 401(K) system or it can merge the current enterprise annuity system into a 401(K) program, but either way, the tax system remains an obstacle.

And who's to say that all the money flowing into these retirement accounts will end up in the stock market?

Currently, 30 percent of China's enterprise annuity funds, or 100 billion yuan, can be invested in stocks, according to regulations released in May.

"There's no way that all the 100 billion yuan will be spent to buy shares," Chen Liang, head of fund management under the Ministry of Human Resources and Social Security, told the Economy and National Weekly. "No fund manager will take up the full quota when the markets are in a slump."

In fact, 100 billion yuan is no big deal in the stock market, where daily turnover has been running at about 100 billion yuan.

But China International Capital Corp, the country's leading investment bank, remains optimistic.

It said it might take another one or two years for China to create its own version of 401(K), but the system could deliver up to 300 billion yuan to the A-share market. That is "an efficient way to solve liquidity pressure in the stock markets," CICC said in a note earlier last month.

If CICC is right, China's 401(K) plan, or possibly an expanded enterprise annuity system, will become another heavy market player, just like the National Council for Social Security Funds.

Domestic stocks

The council, which managed total assets of more than 856 billion yuan at the end of last year, can invest up to 30 percent of its assets in domestic stocks. They are channeled through designated fund-management firms.

Market moves by the well-connected council are legendary. The social security fund increased its exposure to stocks fivefold to more than 2.6 billion shares when the Shanghai Composite Index slumped 20 percent to 998 points in June 2005.

The fund started to sell after the index surged to more than 1,600 points a year later and slashed its stock investments to 778 million shares before the stock market crashed amid the global financial crisis in 2008.

But the council investments took a huge toll on millions of ordinary investors, who rushed to follow the institutional giant into the markets but failed to get out quite so deftly.

One wonders whether another big market player like 401(K) funds would prove to be a similar curse on small individual investors.

Those who see 401(K) as a panacea for the market's ills are overlooking the fact that liquidity isn't the major problem dragging stocks down.

The real culprit is lack of investor confidence. Who can blame nervous investors amid publicized cases of fraud and other scandals surrounding market activities?

What the market needs more than 401 (K) is tighter market supervision, transparency and the idea of a fair chance for everyone who invests. Officials may be casting their net elsewhere to deflect criticism of their own performance.