| After World War Two, the "Beveridgian Report" leaded socialsecurity systems of "from cradle to tomb" in North European countriesinto full development stage until the 1970s. Nevertheless, the reformprocess of Western countries on pension has been on a long way in 1980s.Especially from 1990s, a majority of Western countries' pension systemsbegan fully or partially to introduce funded systems. What is the deep root of ever-shifting pension? The unbalancedpopulation structure is the direct source, since the basic assumption ofPAYG is long term relatively stable population structure. However, theinteraction between pension funds and capital market is the economicreason of reform on pension. It has become and is going to be the focalissue of most countries' pension and become the frontline and heatedresearch region of global pension in which it can become the keyrestriction of the tropism of funded pension. This paper focuses on the theoretical framework of the interactionbetween pension funds and capital market and concludes that thecommon restrictions of the interaction between these two. Furthermore,we use the practical situation of the interacting between pension fundsand capital market in China, on the basis of the common restriction, todescribe the policy advice to carry out the interacting between pensionfunds and capital market in the near future of China. Chapter One describes the basic issue of this paper, the latestresearch situation, context, goal, method, technology and innovation. Chapter Two puts effort on the theoretical research of the influenceof pension funds development upon capital market. It is explained fromthree angles: the social saving structure, assets structure of pension fundsbeneficiaries, and the balance of financial market. Long-term saving effect. The reform of funded pension exerts aninfluence on the quality of society saving, it can optimize the structure ofsocial saving, in case of a stable social saving, enable long-term savingincreasing by a large margin. And because pension funds belongs tomandatory, long term social saving, compared with other institution, it ismore likely to transform from long-term saving into long-term investmenteffectively then provide extra long-term capital for capital marketdevelopment. This effect can be described as: P ( pension funds) ↑→S l(Long-term saving) ↑→Ml (long-term funds) ↑→C ( capital market) ↑. Liquidity effect. From the point of view of pension beneficiaries,pension funds as mandatory saving, belongs to non-liquid financial assets.When the beneficiaries pay in their incomes, the liquidity structure oftotal assets is changed, liquid assets decrease and non- liquid assetsincrease. Based on the liquidity beneficiary requires, he will sellnon-liquid assets, hold liquid assets again, as a whole, the social financialassets demand will increase, thus promote the development of capitalmarket. This effect can be described as: P (pension funds) ↑→L (theliquidity of the assets) ↓→LA (liquid assets) ↑→C (capital market) ↑. Interest rate effect. While that the pension funds is beingaccumulated constantly, the financial assets demand increases, thenincrease market demand of the money market, quasi-money market andstock market. This will reduce the balanced interest rate level of thewhole financial market, including the true interest rate level of the capitalmarket, undoubtedly reduce the capital cost of departments, such asenterprise etc, lower the risk premiums of the capital market, and reducethe gap between long-term interest rate and short-term interest rate of themarket. Therefore, the development of the pension funds will promote thegrowth of the capital market and real economy through the effect ofreducing the true rate of interest of financial market. This effect can bedescribed as: P (pension funds) ↑→I (market interest rate) ↓→FAP (theprice of financial assets) ↑→C (capital market) ↑. Aside from the above, it not only discussed the conductionmechanism that the pension funds influences the capital marketing,...
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