The paper analyzes the interaction between the pension system and capital marketdevelopment, especially the case of China. A funded pension system is most likely to boostthe capital market, but in the absence of a supportive financial infrastructure and effectivefinancial regulation, a funded system will not be successful. Chinas determination to establisha partially funded system is a first step in the right direction, but without the separation ofindividual accounts from the social pooling and their replenishment, the working out of theimplicit pension debt, and improvements in pension fund management and regulation, thepension system will not be sustainable. The key to capital market development in the processof the pension reform is to enact laws to protect the interests of pensioners, to contract outpension fund management to professional asset managers, and to accelerate the financialopening. The paper analyzes the interaction between the pension system and capital market development, especially the case of China. A funded pension system is most likely to boost the capital market, but in the absence of a supportive financial infrastructure and effective financial regulation, a funded system will not be successful. Chinas determination to establisha partially funded system is a first step in the right direction, but without the separation of individual accounts from the social pooling and their replenishment, the working out of theimplicit pension debt, and improvements in pension fund management and regulation, thepension The key to capital market development in the process of the pension reform is to enact laws to protect the interests of pensioners, to contract outpension fund management to professional asset managers, and to accelerate the financialopening.