The State Council said on Sunday that it will allow China’s pension fund to invest up to 30 per cent of its total 3.5 trillion yuan in net assets in equities and stocks, a likely bid to support the flagging market that billions of yuan in injected liquidity over the past week has failed to revive. The much anticipated move from the top decision-making body was aimed at boosting returns at the fund, which has so far been limited to low-yielding treasury notes and bank deposits, Xinhua news agency reported. The pension fund accounted for about 90 per cent of China’s social security pool. Markets in Shanghai and Shenzhen suffered last week as retail investors seemingly took advantage of any modest advance in the markets as an opportunity to dump stocks. The benchmark Shanghai Composite Index lost 11.5 per cent over the past week to hit a six-week low on Friday, as sentiment worsened amid soaring capital outflows and escalating tension between North and South Korea. The sentiment dragged Hong Kong’s Hang Seng Index, which lost 7 per cent to touch a 15-month low. The upcoming week could see a battle in the market between two forces. The Chinese government could step up its monetary loosening to rescue the market as the key Shanghai index is struggling to stay above the psychological 3,500 point level. On the other hand, retail and institutional investors could ramp up by cashing out and draining liquidity from domestic equities as part of a risk-off strategy after the devaluation of the renminbi. “Beijing will increasingly have to choose between propping up the equity market and defending the currency from further downside pressure. They will not be able to do both. Both the local stock market and the currency are significantly overvalued, and the veil of government support for both markets has been pierced, giving way to free market forces. We continue to expect lower equity prices and continued weakness in the yuan,” said BMI Research, a division of the Fitch Group. China’s monetary data in July has shown that the central bank poured nearly 1 trillion yuan into an all-out effort to arrest a crash in its stock markets last month. But there has been no meaningful impact so far. The Shanghai benchmark closed Friday at 3,507.74, close to the near-term trough hit on July 8. Standard Chartered economists led by Shuang Ding expect the central bank to resort to cutting the reserve requirement ratio to support the market. So far, the central bank has avoided using broad-based tools such as RRR cuts. Instead, it injected a net 150 billion yuan into the banking system through reverse repos, yet it failed to bring down the seven-day repo rate. “We think the central bank may well take this approach, as liquidity losses from capital outflows could last for a while,” the bank said in a report released on Friday. The seven-day SHIBOR, the Shanghai interbank offered rate, is hovering at a one-month high of 2.5990 on Friday. Foreign investors have pulled a combined US$14.5 billion from Chinese shares between August 8 and August 20, according to a report released by the Jefferies on Friday.