The introduction of the pension fund into the market will significantly increase the role of institutional investors and support a healthy capital market, said Zheng Bingwen, a social security specialist at the Chinese Academy of Social Sciences

With low risk appetite and abundant liquidity, pension funds tend to hold stocks longer for future returns and will effectively counter speculation and reduce volatility, Zheng explained.

Unlike in China, pension funds act as a cornerstone for value investing in many developed countries. In the United States, Zheng said, pension funds account for 60 percent of the country's capital market value.

Initiated in the early 1990s, China's pension fund has previously been limited to safe but low-yielding investments in bank deposits and treasury bonds.

In the latest guidelines, the State Council stressed safety in the pension fund investments, saying the management must "prioritize safety and firmly control risks."

Local governments will decide the capital amount to be invested and only institutions authorized by the State Council can operate such capital. Fund managers are required to set up reserve funds valued at 20 percent of management fees and 1 percent of yearly returns to cover for possible losses.

The risks for the pension fund investment in the stock market will be "controllable," said Ma Li, an official in charge of housing provident funds in Shanghai.