On September 26, Caixin reported that a guiding document to promote the entry of medium and long-term funds into the market and to nurture and expand "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 in the recent days, they will issue the "Guiding Opinions on Promoting the Entry of Medium and Long-term Funds into the Market."

On September 26, the meeting of the Political Bureau of the CPC Central Committee deployed efforts to strongly guide the entry of medium and long-term funds into the market, remove barriers to the entry of funds from social security, insurance, wealth management, and make efforts to boost the capital market.

On the same day, the Office of the Central Financial and Economic Affairs Commission 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" (hereinafter referred to as the "Guiding Opinions"). With an overall goal focusing on "more long-term funds, longer-term funds, and better returns", it puts forward key measures in three aspects: constructing and nurturing a capital market ecology that encourages long-term investment, vigorous development of equity public funds, and concerted efforts in improving policy systems to facilitate the entry of various medium and long-term funds into the market.

Industry insiders believe that the significance of the Political Bureau meeting's deployment is profound, and the guiding opinions serve as the "action plan" for the entry of medium and long-term funds into the market. 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 market stability, effectively boost the capital market.

Institutions also believe that medium and long-term funds, due to their stable funding sources and high level of professional investment operations, can overcome short-term market fluctuations and are the cornerstone for the healthy and stable development of the capital market. Medium and long-term funds can also realize long-term preservation and appreciation by investing in listed companies and steady growth of the national economy through the capital market.

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

First, from the perspective of institutional reforms, allowing insurance funds, various retirement funds, and other institutional investors to participate in the non-public issuance of listed companies as strategic investors in accordance with the law.

Second, studying the optimization or exemption of regulatory requirements such as short-term trading and shareholding by institutional investors in ETFs.

Third, establishing a sound evaluation mechanism for medium to long-term funds like insurance funds and various retirement funds with a period of more than three years, improving the evaluation mechanism, and enriching the long-term investment models of insurance funds.

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

Fifth, supporting the personal choice strategy of enterprise annuities, allowing differentiated investments by fund managers.

In addition, regulators have also proposed encouraging bank wealth management and trust funds to actively participate in the capital markets, optimizing incentive mechanisms, facilitating market access, and increasing equity investment scale.

From ecology, products to institution, implementing three major measures to create a 'long money, long-term investment' environment.

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

However, although the entry of medium and long-term funds into the market has achieved certain results, there are still prominent problems in the capital market such as insufficient total volume of medium and long-term funds, suboptimal structure, and inadequate leading role, and the system environment of "long money and long investment" has not been fully formed yet.

Centered around the construction of the capital market ecosystem, the development of public and private equity funds, and supporting policy systems, this "Guiding Opinions" proposes three specific measures:

Measure one: Construct and cultivate the capital market ecosystem that encourages long-term investments.

Take multiple measures to improve the quality of listed companies, encourage eligible listed companies to buy back and increase shareholdings, effectively enhance the investment value of listed companies. Crack down severely on various illegal activities in the capital market, continually shape a healthy market ecosystem. Improve the basic systems of the capital market that are suitable for long-term investments, enhance the supervision of transactions of medium and long-term funds, improve the supporting mechanisms for institutional investors to participate in the governance of listed companies, and promote long-term positive interactions with listed companies.

Measure two: Vigorously develop equity public funds and support the steady development of private equity securities investment funds. Equity funds are an important vehicle for incremental funds in the market. The regulation in the "Guiding Opinions" outlines four directions for the development of equity funds and private equity funds:

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

The second is to enrich the categories 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.

The third is to steadily lower the overall fee rates of the public fund industry and promote the transition of public fund investment advisory pilot programs to regular practices.

Fourth, encourage private equity securities investment funds to diversify product types and investment strategies, promote securities fund futures operators 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 supporting policies and systems for various types of medium and long-term funds to enter the market. The "Guiding Opinions" point out the establishment of a three-year or longer long-term assessment mechanism for commercial insurance funds, various pension funds, and other medium and long-term funds. Promote the establishment of a long-term performance-oriented approach. Foster and strengthen patient capital such as insurance funds. Eliminate institutional barriers that affect long-term investment of insurance funds, improve assessment mechanisms, enrich long-term investment models of commercial insurance funds, improve equity investment regulatory systems, urge and guide state-owned insurance companies to optimize the long-term assessment mechanism, promote insurance institutions to become steadfast value investors, and provide stable long-term investments for the capital markets.

Improve the investment policy and system of national social security funds and basic pension insurance funds, support qualified employers to allow individual investment choice in corporate annuities, encourage corporate pension fund managers to explore differentiated investments. Encourage banks' wealth management and trust funds to increase equity investment scale.

How to eliminate obstacles for medium and long-term funds to enter the market? Five major categories of funds each have new highlights.

Insurance funds, social security funds, corporate pension funds, various pension funds and other stable sources of medium and long-term funds have long liabilities and natural advantages for developing long-term equity investments, with good adaptability to the capital markets. However, due to the current assessment system, evaluation mechanisms, etc., the above-mentioned medium and long-term funds tend to lean towards the relatively stable bond market, with relatively low allocation to the equity market.

Taking insurance funds as an example, under the current accounting system, stock price fluctuations will immediately affect their current profits. In addition, with the short assessment period, it will further impact the company's performance. How can this situation be resolved? Feedback from the industry shows that this "Guiding Opinions" focuses on these important types of medium and long-term funds, each with different arrangements.

First, from a systemic reform perspective, allow institutional investors such as insurance funds and various pension funds to participate in private placements of listed companies as strategic investors in accordance with the law.

Industry insiders point out that allowing institutional investors such as insurance funds and various pension funds to participate in private placements of listed companies as strategic investors in accordance with the law can effectively enhance the enthusiasm and stability of these institutional investors in participating in the capital market, and help 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 about revitalizing the capital markets and boosting investor confidence, informing the market that the national social security funds can participate in the private placement of listed companies as strategic investors. In September 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, optimize, or exempt ETFs and other institutional investors from short-term trading, takeover, and other regulatory requirements.

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 a sound evaluation mechanism for insurance funds, various pension funds, and other long-term funds with a duration of more than 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 investment returns. Among them, the short-term evaluation issues of pension funds are particularly prominent, with the pressure of fiduciaries and trustees cascading down, investment managers emphasizing stability, and investment portfolios unable to withstand significant short-term market fluctuations. Limitations in accounting, performance evaluation, solvency requirements, etc., have made it difficult for insurance funds to invest in equities, making it challenging to achieve 'long-term and long-term investments'.

In addition, insurance funds generally face short-term evaluation issues in investments in unlisted company equities and listed company stocks, which inhibit the enthusiasm and stability of insurance companies' equity investments, making it difficult to leverage their long-term capital attributes. In October 2023, with the approval of the State Council, the Ministry of Finance clearly implemented a combined assessment method of 'three-year cycle + current year' for state-owned insurance companies' 'net asset return rate', which helped enhance the enthusiasm and stability of insurance companies' equity investments and made some progress. However, there are still issues with the excessive weight on the 'current year profit' indicator, and the lower weight on medium and long-term evaluation indicators, 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 stocks such as the csi 300 index constituent stocks and star market listed ordinary shares, but the reduction range and extent are relatively small, still not meeting market demand.

The 'Guiding Opinions' clearly put forward measures such as 'establishing a sound evaluation mechanism for insurance funds, various pension funds, and other long-term funds with a duration of more than three years' and 'unblocking institutional barriers affecting long-term investments of insurance funds, improving evaluation mechanisms, and urging and guiding state-owned insurance companies to optimize long-term evaluation mechanisms,' to address the institutional obstacles faced by insurance funds' equity investments, promote insurance companies to be steadfast value investors, providing stable long-term investments for capital markets and technological innovation.

In addition, the regulators have expanded the pilot scope of long-term investment of insurance funds, explored more long-term investment models for insurance funds, which is conducive to supporting insurance funds in overcoming market entry barriers such as performance assessment, accounting treatment, solvency supervision, reducing the capital occupation of equity investments for insurance companies, mitigating the impact of short-term market fluctuations on the investment performance and salary levels of insurance companies, and promoting the increase in the scale and proportion of equity investments by insurance funds, enhancing the stability of investment behavior, and increasing long-term returns.

It is noteworthy that China Life Insurance and New China Life Insurance have announced a joint investment of 50 billion yuan to establish a private equity fund manager to indirectly carry out long-term stock investments, initiating a pilot program for long-term stock investments by insurance funds. Within the industry, it is believed that with the successful implementation of the pilot program, more large insurance companies may directly invest in A-shares and Hong Kong stocks in the form of private securities in the future.

Fourth, improve the investment policy system of the National Social Security Fund and the Basic Pension Insurance Fund.

In response to the issues of the upper limit of equity investment ratio of the National Social Security Fund, the imperfect assessment mechanism of the Basic Pension Insurance Fund, and the low degree of market-oriented operation, the above-mentioned "Guiding Opinions" clearly propose "improving the investment policy system of the National Social Security Fund and the Basic Pension Insurance Fund". By expanding the sources of funds for the National Social Security Fund, optimizing the entrusted investment mode of the Basic Pension Insurance Fund, and improving the market-oriented operation level of the Basic Pension Insurance Fund, it aims to promote the benign interaction between the pension security system and the capital market.

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

As an important part of medium and long-term funds, the investment policy of enterprise annuities has been optimized. The "Guiding Opinions" clearly state, "supporting eligible employers to open up individual selections for enterprise annuities", where employers can set up different risk-return preference investment strategy options according to their needs. Employees can then choose a more suitable investment strategy based on their understanding of the strategy differences and personal risk tolerance. In addition, "encouraging pension fund managers to explore differentiated investments" can effectively improve the situation of investment convergence and lack of firmness by encouraging all parties to conduct differentiated investments from top to bottom.

It is worth noting that in addition to social security and insurance, the entry of wealth management funds into the market was also mentioned at this politburo meeting. Industry institutions have stated that wealth management funds have immense potential, and optimizing incentive and evaluation mechanisms, as well as smoothing market entry channels, can effectively increase the scale of equity investments by wealth management funds.

Editor/Emily