The Central Political Bureau meeting held on September 26 proposed efforts to invigorate the capital market, vigorously guide medium and long-term funds into the market, and unblock the points of entry for funds from social security, insurance, financial management, and other sources. On the same day, the Central Financial Office and the China Securities Regulatory Commission (CSRC) jointly issued the "Guiding Opinions on Promoting Medium and Long-Term Funds into the Market" (hereinafter referred to as the "Guiding Opinions"). Recently, at the 2024 Financial Street Forum Annual Conference, CSRC Chairman Wu Qing emphasized the vigorous development of equity-based public funds and categorized strategies to unblock the pain points and difficulties for medium and long-term funds to enter the market. A series of measures demonstrate the financial regulatory authorities' determination to increase the entry of long-term funds into the market. A-shares are expected to welcome incremental medium and long-term funds, playing a positive role in stabilizing the capital market, optimizing the investor structure, and supporting the real economy in various aspects.

Enhancing Market Stability

Medium and long-term funds have a high degree of professional investment operation and strong stability, which is very important for overcoming short-term market fluctuations. The new "Nine National Articles" introduced in April this year require the establishment and cultivation of a market ecosystem for long-term investment, the improvement of basic systems compatible with long-term investment, and the construction of a policy system supporting "long-term money for long-term investment." Vigorously develop equity-based public funds and significantly increase the proportion of equity funds. Establish a fast approval channel for exchange-traded funds (ETFs) to promote the development of index investment.

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The "Guiding Opinions" focus on three aspects: continuously optimizing the capital market ecosystem, vigorously developing equity-based public funds, and focusing on improving various supporting policies and systems for medium and long-term funds to enter the market.

Why does the market need medium and long-term funds? Medium and long-term funds focus more on long-term investment and value investment, paying attention to the fundamentals of enterprises rather than pursuing short-term hot spots. Chief Economist of Galaxy Securities, Zhang Jun, stated that first, the entry of medium and long-term funds into the market will greatly improve the investor structure, help reduce short-term market fluctuations, and enhance market stability. Second, medium and long-term funds unearth high-quality targets, which helps optimize resource allocation. As funds gather around high-quality listed companies, market resource allocation becomes more rational, helping to guide long-term industrial development. Third, medium and long-term funds are also an important channel for residents to enter the market. Amid the general trend of residents' wealth allocation tilting towards equity assets, the introduction of medium and long-term funds will better play the role of institutional investors as a bridge, promoting the transformation of residents' savings into investment.

At present, China's economy is at a critical period of high-quality development. With the continuous increase in residents' asset allocation, wealth management, and pension investment needs, the demand for medium and long-term funds to increase equity investment is also growing.

"In recent years, the CSRC has vigorously promoted the development of equity-based public funds and, together with relevant parties, has continued to promote medium and long-term funds into the market, achieving some phased results," Wu Qing said at a press conference held by the State Council Information Office on September 24. As of the end of August this year, the combined holdings of A-shares' circulating market value by professional institutional investors such as equity-based public funds, insurance funds, and various pension funds approached 15 trillion yuan, more than doubling from the beginning of 2019, and the proportion of A-shares' circulating market value increased from 17% to 22.2%.

"There is still a lot of room for improvement in the proportion of institutional investors and medium and long-term funds," Chief Economist of Huafu Securities, Yan Xiang, believes that promoting medium and long-term funds into the market will promote the optimization of investor structure and the cultivation of market value investment concepts. At the same time, it can better play the role of "stabilizer" and "ballast stone" when the market fluctuates greatly, alleviating investors' worries and promoting further improvement in market stability.

Developing Equity-Based Public Funds

The "Guiding Opinions" provide a clear "action program" for promoting medium and long-term funds into the market, starting from problem orientation and precise policy-making. Yan Xiang believes that with the implementation of related measures, it will be beneficial to increase the scale and proportion of medium and long-term funds' investment, optimize the capital market's investor structure, strengthen the long-term nature of investment behavior and the market's inherent stability, and consolidate the foundation for the stable operation and healthy development of the capital market.The "Guidance Opinions" propose to vigorously develop equity-oriented public mutual funds and support the steady growth of private securities investment funds. It emphasizes strengthening the core investment research capabilities of fund companies, establishing a scientific, reasonable, and fair investment research capability evaluation index system, guiding fund companies to shift from scale orientation to investor return orientation, and striving to create long-term and stable returns for investors. It also calls for enriching the types of assets that public mutual funds can invest in, establishing a fast-track approval channel for ETF index funds, and continuously increasing the scale and proportion of equity funds. There is a steady push to reduce the comprehensive fee rates of the public mutual fund industry and to promote the transition of public mutual fund investment advisory pilot programs to regular operations.

As an important component of inclusive finance, public mutual funds have always been significant institutional investors and long-term capital providers in the capital market. To truly retain this type of long-term capital and attract more long-term capital into the market, it is necessary to provide reasonable returns to investors and enhance the ability to create long-term returns for investors.

For public mutual funds, Huaxia Fund believes that on one hand, it is necessary to increase the stability of fund product performance and truly improve the sense of gain for fund investors through measures such as the construction of a gradient of investment research talent, the design of long-term assessment systems, and guiding and accompanying investors. On the other hand, it is also necessary to leverage its professional advantages to achieve differentiated and specialized operations, continuously enrich product types to meet the diverse investment and wealth management needs of different types of investors, and provide full-chain wealth management service capabilities.

ICBC Credit Suisse Fund stated that it is important to strengthen the core investment research capabilities of fund companies and strive to create long-term and stable returns for investors. The key lies in establishing a scientific, reasonable, and fair investment research capability evaluation index system, leveraging the role of assessment as a guiding tool, and guiding fund companies to shift from scale orientation to investor return orientation.

In recent years, regulatory authorities have continuously guided the development of public equity funds and promoted the innovation of index products. The concept of index-based investment has increasingly gained recognition among investors. ETF products, with their transparency, low fees, and convenient trading, have become an important tool for residents' asset allocation. Wind data shows that as of the end of September 2024, the scale of domestic ETFs has grown to 3.5 trillion yuan, with the scale of equity ETFs reaching 3.2 trillion yuan, breaking through the 3 trillion yuan mark for the first time.

In the view of market analysts, the development of the ETF market will show trends of diversification, specialization, and innovation. The new "Nine National Articles" and related policies provide a clear policy orientation and driving force for the development of ETFs. ETFs will attract more medium and long-term capital investment, aiding in the healthy and stable development of the capital market.

"As an important tool in the market, the counter-cyclical regulatory function of ETFs is becoming increasingly prominent. During market downturns, equity ETFs can still continue to attract market capital inflows, providing stable support for the market," said Chen Ge, General Manager of Fu Guo Fund. The investor structure of ETFs is becoming more diverse, with a significant increase in the proportion of institutional investors. According to Wind data statistics, as of the end of June 2024, the proportion of institutional investors in the entire market's equity ETFs has increased from 44% at the end of 2023 to 55%. Long-term institutional investors, represented by state-owned capital and insurance companies, are gradually becoming an important force in the ETF market.

Improving the System Environment for Long-Term Capital Entry

It needs to be recognized that although institutional investors have increased their market entry in recent years, the current total amount of long-term capital in China's capital market is still insufficient, the structure is not optimal, and the leading role is not fully played, and the system environment for long-term capital investment has not yet been fully formed.

For example, insurance funds are large in scale, long in term, and stable in source, and naturally have the attributes of patient capital, which has always been the long-term money expected by the market, but there is still a large room for improvement in the proportion of equity investment. Data released by the Financial Regulatory总局 shows that as of the end of June this year, the balance of insurance industry funds used was 30.87 trillion yuan, of which the balance of personal insurance companies and property insurance companies investing in stocks and securities investment funds was 3.78 trillion yuan, accounting for about 12%. The maximum limit for equity investment stipulated by regulatory authorities is 45%.The "Guidance Opinions" proposed this time aim to establish and improve a long-term assessment mechanism for commercial insurance funds, various types of pension funds, and other medium to long-term funds with a cycle of over three years, promoting the establishment of a long-term performance orientation. The cultivation and growth of patient capital such as insurance funds, the removal of institutional barriers affecting long-term investment by insurance funds, the improvement of assessment mechanisms, the enrichment of long-term investment models for commercial insurance funds, and the perfection of regulatory systems for equity investments are all emphasized. It is urged to guide state-owned insurance companies to optimize long-term assessment mechanisms, encouraging insurance institutions to become steadfast value investors and providing stable long-term investments for the capital market.

Improving the supporting policies and systems for various types of medium to long-term funds entering the market is of great significance for insurance-based medium to long-term funds. The person in charge of China Life believes that optimizing the long-term assessment mechanism can help alleviate the mismatch between the long-term investment goals of medium to long-term funds centered on insurance funds and the short-term assessment cycles. Due to requirements in accounting, performance assessment, solvency, and other aspects, insurance funds face certain practical constraints in equity investment, and most insurance companies' stock investment ratios still have a significant gap from the policy limits.

Wang Guojun, a professor at the School of Insurance at the University of International Business and Economics, believes that promoting stable and long-term investment by insurance companies in the capital market requires institutional innovation and deepening reforms. Enhancing the long-term return capacity of the capital market is the core, while optimizing assessment mechanisms and strengthening the capacity building for equity investment by insurance companies are important levers for reform.

In addition, the birth of more policy tools has also broadened the channels for medium to long-term funds such as insurance funds to enter the market. On October 10th, the People's Bank of China decided to create a swap facility for securities, funds, and insurance companies, supporting qualified securities, funds, and insurance companies to swap high-grade liquid assets such as government bonds and central bank bills from the People's Bank of China using bonds, stock ETFs, and constituents of the Shanghai-Shenzhen 300 index as collateral.

Li Yunze, Director of the Financial Regulatory总局, stated at the 2024 Financial Street Forum Annual Meeting that support will be given to qualified insurance institutions to establish new private securities investment funds and increase market stabilization efforts. It is understood that China Life and New China Life have already started pilot programs, jointly initiating the establishment of private securities investment funds to raise insurance funds for investment in the capital market. The fund has a registered capital of 50 billion yuan and has officially begun investment operations, with the current progress going smoothly.