On September 26, Caixin Financial News reported that the guiding document for promoting the entry of medium and long-term funds into the market and nurturing the growth of "patient capital" has been implemented.

On September 24, at a press conference of the State Council Information Office, Wu Qing, Chairman of the China Securities Regulatory Commission, stated that the "Guiding Opinions on Promoting the Entry of Medium and Long-Term Funds into the Market" will be issued soon.

On September 26, the Central Political Bureau meeting of the Communist Party of China deployed vigorous efforts to guide the entry of medium and long-term funds into the market, unblock the barriers for social security, insurance, wealth management, and other funds into the market, and strive to boost the capital markets.

On the same day, the Central Financial Work Bureau and the China Securities Regulatory Commission officially jointly issued the "Guiding Opinions on Promoting the Entry of Medium and Long-Term Funds into the Market" (referred to as the "Guiding Opinions" below). Focused on the overall goal of "more long-term funds, longer-term funds, and better returns," it specifically proposes measures in three areas: building and nurturing a capital market ecosystem that encourages long-term investment, vigorously developing equity public mutual funds, and focusing on improving various supporting policies and systems for the entry of medium and long-term funds into the market.

Industry insiders believe that the significance of the Political Bureau meeting's deployment is far-reaching, with this guidance considered as the "action plan" for the entry of medium and long-term funds into the market. Some analysts point out that with the implementation of the above measures, it will help increase the scale and proportion of medium and long-term fund investments, optimize the structure of capital market investors, strengthen the long-term nature of investment behavior and the intrinsic stability of the market, effectively boosting the capital markets.

Institutions also believe that medium and long-term funds, due to their stable funding sources and higher degree of professional investment operations, can overcome short-term market fluctuations. They are the cornerstone for the healthy and stable development of the capital markets and can also share the steady growth benefits of listed companies and the national economy through capital market investments, achieving long-term value preservation and appreciation.

Regarding insurance funds, social security funds, enterprise annuities, various pension funds, wealth management, and other five categories of long-term funds, each has its own institutional arrangements:

Firstly, from the perspective of institutional reform, allowing insurance funds, various pension funds and other institutional investors to legally participate in the issuance of shares by listed companies as strategic investors.

Secondly, studying and optimizing or exempting institutional investors such as ETFs from short-term trading, stakeholding, and other regulatory requirements.

Thirdly, establishing a sound assessment mechanism for medium and long-term funds such as insurance funds, various pension funds, for periods exceeding three years, improving evaluation mechanisms, and enriching the long-term investment models of insurance funds.

Fourthly, improving the investment policy system for national social security funds and basic pension insurance funds.

Fifthly, supporting the individual strategic choices of enterprise annuities, allowing managers to make differentiated investments.

In addition, regulators have also proposed encouraging commercial bank wealth management and trust funds to actively participate in the capital markets, optimizing incentive assessments, ensuring smooth market entry channels, and increasing equity investment scale.

From ecology, products to institutions, three major measures are taken to create an environment for "long money and long-term investment".

In recent years, the proportion of medium and long-term funds in A-shares has continued to increase, playing an important stabilizing role. As of the end of August 2024, the combined market value of A-shares held by equity public funds, insurance funds, various pension funds and other institutional investors totaled 14.5 trillion yuan, more than doubling from the beginning of 2019, with the proportion of A-share market value held rising from 17% to 22.2%.

However, although some progress has been made in attracting medium and long-term funds to the market, there are still prominent issues in the capital market such as insufficient total amount of medium and long-term funds, suboptimal structure, and inadequate leadership role, and the institutional environment of "long-term money, long-term investment" has not yet fully formed.

Focused on the construction of the capital market ecosystem, the development of public and private equity funds, and the supporting policy system, this 'Guidance' proposes three specific measures:

Measure one: Construct and foster a capital market ecosystem that encourages long-term investment.

Taking multiple measures to improve the quality of listed companies, encourage eligible companies to repurchase shares and increase shareholdings, effectively enhance the investment value of listed companies. Harshly crack down on various illegal activities in the capital market, continuously shape a healthy market ecosystem. Improve the basic system of the capital market adapted for long-term investments, enhance the regulation of medium and long-term fund transactions, improve the supporting mechanisms for institutional investors to participate in the governance of listed companies, and promote long-term beneficial interactions with listed companies.

Measure two: Vigorously develop equity public funds, support the stable development of private equity investment funds. Equity funds are an important carrier of incremental funds in the market. In the 'Guidance,' regulators provide four main directions for the development of equity funds and private equity funds:

First, strengthen the investment research core capabilities of fund companies, establish a scientifically reasonable, fair and effective investment research capability evaluation index system, guide fund companies to shift from size orientation to investor return orientation, and strive to create long-term stable returns for investors.

Second, enrich the types of assets that public funds can invest in, establish a fast-track approval channel for ETF index funds, and continuously increase the scale and proportion of equity funds.

Third, steadily reduce the comprehensive fee rate of public funds, promote the transition of public fund investment advisory trials to regular practice.

Fourth, encourage private equity securities investment funds to enrich product types and investment strategies, promote securities funds and futures operation institutions to increase the proportion of equity private equity asset management business, and adapt to the differentiated wealth management needs of residents.

Measure three: focus on improving various types of long-term funds entry policies and systems. The "Guiding Opinions" point out that it is necessary to establish a sound evaluation mechanism for commercial insurance funds, various pension funds, and other long-term funds with a period of over three years. Promote the establishment of a long-term performance-oriented approach. Cultivate and strengthen patient capital such as insurance funds. Eliminate institutional obstacles that affect the long-term investment of insurance funds, improve evaluation mechanisms, enrich long-term investment models of commercial insurance funds, enhance equity investment regulatory systems, urge and guide state-owned insurance companies to optimize long-term evaluation mechanisms, and promote insurance institutions to become steadfast value investors, providing stable long-term investment for the capital markets.

Improve the investment policies and systems of the National Social Security Fund and the Basic Pension Insurance Fund, support qualified employers to open up individual investment choices for corporate annuities, encourage corporate annuity fund managers to explore differentiated investments. Encourage bank wealth management and trust funds to increase the scale of equity investments.

How to remove obstacles for long-term funds entering the market? Five major categories of funds each have new perspectives.

Insurance funds, social security funds, enterprise annuities, various pension funds, and other long-term funds have stable sources, long liability periods, and natural advantages for longer-term equity investments, which are relatively well-suited to the capital markets. However, due to current evaluation systems and mechanisms, the aforementioned long-term funds tend to lean towards the relatively stable bond market, rather than high equity market allocations.

Taking insurance funds as an example, under the current accounting system, stock price fluctuations can immediately impact their current profits, coupled with short evaluation periods, further affecting company performance. How to break through? Feedback from the industry shows that the current "Guiding Opinions" focuses on these important types of long-term funds, each with different arrangements.

Firstly, from a institutional reform perspective, allowing institutional investors such as insurance funds and various pension funds to participate as strategic investors in private placements of listed companies.

Industry insiders point out that allowing institutional investors such as insurance funds and various pension funds to participate as strategic investors in private placements of listed companies can effectively enhance their enthusiasm and stability in participating in the capital market, which is beneficial for long-term funds to increase long-term returns through relevant mechanisms.

As early as August last year, the relevant person in charge of the CSRC answered questions from reporters regarding the active capital markets and boosting investor confidence, informing the market that the National Social Security Fund can participate in private placements of listed companies as strategic investors. In September of this year, SDIC Power Holdings issued 0.55 billion shares of A-shares to the social security fund, becoming the first example of the National Social Security Fund participating in the private placement of listed companies as a strategic investor.

Secondly, research optimization or exemption of short-term trading and shareholding requirements for institutions such as ETFs.

Currently, ETFs and other professional institutional investors are subject to constraints such as short-term trading and disclosure of large shareholdings during the investment process. However, with the continuous expansion of ETF management scale and market influence, some ETF products have approached the 5% single stock holding limit. In this regard, regulators point out that studying the optimization or exemption of relevant regulations for professional institutional investors who adhere to long-term investments and do not seek control is in line with the original legislative intent of the Securities Law and also helps to avoid disturbing their normal investment operations, enhancing their investment convenience.

Thirdly, establish and improve the assessment mechanism for long-term funds such as insurance funds and various retirement funds exceeding three years, improve the evaluation mechanism, and enrich the long-term investment models of insurance funds.

Pension funds, insurance funds, and others all face short-term evaluation issues, affecting investment stability and long-term returns. Among them, the short-term evaluation problem of pension funds is particularly prominent, with pressure from agents, trustees, and an emphasis on stability by investment managers. The investment portfolio is unable to withstand significant short-term market fluctuations. Historically, due to requirements in accounting, performance evaluation, solvency, etc., insurance funds still face certain practical difficulties in equity investments, making it difficult to achieve 'long and stable investment'.

In addition, insurance funds generally face short-term evaluation problems in unlisted equity and listed company stock investments, inhibiting the enthusiasm and stability of insurance companies in equity investments, unable to leverage their attributes as long-term funds. In October 2023, with the approval of the State Council, the Ministry of Finance clearly implemented a 'three-year cycle + current year' evaluation method for state-owned insurance companies' 'return on net assets,' helping to increase the enthusiasm and stability of insurance companies in equity investments and making some progress. However, there are still issues with the evaluation weight of the 'current year profits' index being too heavy and the weight of medium to long-term evaluation indicators being too low, with short-term market fluctuations still having a significant impact on the performance of insurance companies.

Strict evaluation restrictions also force insurance companies to reserve a large space in actual investments, further affecting the enthusiasm of insurance companies for equity investments. In September 2023, with the approval of the State Council, the China Banking and Insurance Regulatory Commission reduced the risk factors for insurance companies investing in constituent stocks of the CSI 300 Index and regular stocks listed on the STAR Market. However, the reduction in scope and extent is small, still falling short of market demand.

The 'Guiding Opinions' explicitly propose measures such as 'establishing and improving the long-term assessment mechanism for insurance funds, various retirement funds, and other long-term funds exceeding three years,' 'removing institutional obstacles affecting long-term investment of insurance funds, improving evaluation mechanisms, and urging and guiding state-owned insurance companies to optimize long-term evaluation mechanisms' to address the institutional barriers faced by insurance funds in equity investments, promote insurance companies to be steadfast value investors, and provide stable long-term investments for the capital markets and technological innovation.

In addition, the regulators have expanded the pilot scope of long-term investment of insurance funds, explored the introduction of more long-term investment models for insurance funds, which will help overcome the market barriers in performance assessment, accounting, solvency supervision, etc., reduce the capital occupation of equity investments for insurance companies, mitigate the impact of short-term market fluctuations on the investment performance and salary levels of insurance companies, promote the growth in size and proportion of equity investments by insurance funds, enhance the stability of investment behavior, and increase long-term returns.

It is worth noting that china life insurance and new china life insurance announced to jointly invest 50 billion yuan to establish a private placement fund manager for indirect long-term stock investments, initiating a pilot project for long-term stock investments by insurance funds. In the industry's view, with the smooth implementation of the pilot, there may be more large insurers investing directly in A shares and Hong Kong stocks in the form of private placements.

Fourth, improve the investment policy system for the national social security funds and basic retirement insurance funds.

In response to issues such as the upper limit of equity investment ratio of the national social security funds, the imperfect assessment mechanism of the basic retirement insurance fund, and the insufficient degree of market-oriented operations, the above "Guiding Opinions" clearly propose to "improve the investment policy system for the national social security funds and basic retirement insurance funds." By expanding the funding sources of the national social security funds, optimizing the investment model for basic retirement insurance funds, enhancing the level of market-oriented operations of basic retirement insurance funds, it aims to promote the interaction between the pension system and the capital markets.

Fifth, support the individual choice strategy for enterprise annuities and allow managers to make differentiated investments.

As an important part of medium and long-term funds, the investment policy of enterprise annuities has also been optimized. The "Guiding Opinions" clearly state, "support qualified employers in opening up individual choices for enterprise annuities," where employers can set investment strategy options with different risk-return preferences according to their needs. Employees can choose more suitable investment strategies according to their understanding of the differences in strategies and personal risk tolerance. Additionally, "encourage pension fund managers to explore differentiated investments," which can effectively improve the situation of investment homogenization and lack of determination by encouraging all parties to conduct differentiated investments from top to bottom.

It is noteworthy that in addition to social security and insurance, the entry of financial management funds into the market was also mentioned at this political bureau meeting. Industry institutions state that there is significant potential in financial management funds, and by optimizing incentive and assessment mechanisms, smoothing market entry channels, it can effectively increase the size of equity investments by financial management funds.

Editor/Emily