China's pension fund is set to receive a 40.4 billion RMB (or about US$5.4 billion) windfall under a new draft rule that will require all state-owned enterprises which listed shares on the market from mid-2006 to contribute the equivalent of 10% of their share offerings to the pension fund. The fund's windfall could be even bigger than 40 billion RMB as the rule is likely to apply to future share offferings as well.

The fund currently manages about 400 billion RMB (US$53 billion), but, according to the World Bank, it will have a shortfall of 9 trillion RMB by 2035 given China's aging population. Financing the shortfall will become more difficult as time goes on since China's retired population is set to rise as a proportion of the total population, due to the impact of China's one-child policy.

In 2001, China introduced a similar policy, which required publicly listed state-owned enterprises to contribute the proceeds of share sales to the pension fund. That rule caused stock market weakness and so was suspended less than half a year after its introduction.

It is unclear whether the pension fund would sell the shares it receives from its windfall, or not. It could sell to diversify its assets or to pay off pension liabilities. Certainly, any large scale sell off by the fund could have negative implications for China's domestic stock market.