CITIC SEC: Medium and long-term funds entering the market may further accelerate, enhancing the inherent stability of the capital market.

CITIC SEC released a research report stating that the entry of medium and long-term funds into the market may accelerate further, enhancing the internal stability of the capital market. The "Implementation Plan for Promoting the Entry of Medium and Long-term Funds into the Market" has been officially launched, making specific arrangements for various types of medium and long-term funds to enter the market, involving commercial insurance funds, pension funds, corporate pension funds, public funds, and more. Among them, public funds, as connectors serving the real economy and residents' wealth, vigorously developing equity funds helps optimize investor structure and better play the role of capital markets in optimizing resource allocation. In particular, with the increasing demand for residents' asset allocation and wealth management, the era of ETFs and investment advisors will gradually arrive. According to Wind data, currently ETFs in China account for only about 11.5% of the net asset value of all funds, and the bank predicts that the development process of passive management products may accelerate in the future. Event: On January 22, 2025, approved by the Central Financial Committee, the Central Financial Office, China Securities Regulatory Commission, Ministry of Finance, Ministry of Human Resources and Social Security, People's Bank of China, and the Financial Supervision Administration jointly issued the "Implementation Plan for Promoting the Entry of Medium and Long-term Funds into the Market", in order to implement the deployment of the Central Committee of the Communist Party of China on September 26, 2024, to vigorously guide the entry of medium and long-term funds into the market, remove obstacles for social security, insurance, wealth management, and other funds to enter the market, and strive to boost the capital market. The plan clearly defines the scope of medium and long-term funds as including commercial insurance funds, national social security funds, basic pension funds, enterprise pension funds, public funds, bank wealth management, and other types of funds. Key points from CITIC SEC: Regarding commercial insurance funds, the plan emphasizes guiding large state-owned insurance companies to increase their investments in A-shares (including equity funds) based on existing foundations. According to data from the China Banking and Insurance Regulatory Commission, as of the end of the third quarter of 2024, the balance of insurance funds used by insurance companies was 27.2 trillion yuan, of which stocks and mutual funds accounted for 3.48 trillion yuan, only 12.8%. There is still considerable room for improvement. The document proposes the following specific measures: 1) The document proposes to "comprehensively implement a long-term performance assessment of three years or more for state-owned insurance companies, with the weight of the net asset return rate not exceeding 30% in the current year's assessment and the weight of the three to five-year cycle indicators not less than 60%". In October 2023, the "Notice on Guiding Long-term and Stable Investment of Insurance Funds and Strengthening the Long-term Performance Assessment of State-owned Commercial Insurance Companies" required state-owned commercial insurance companies to implement a three-year long-term performance assessment in performance evaluations, adjusting the "net asset return rate" indicator to a combination of "three-year cycle indicator + current year indicator" form of assessment, with the weight of the three-year cycle indicator at 50% and the weight of the current year net asset return rate at 50%. This time, the main focus is on reducing the weight of the current year indicator to further optimize the long-term performance assessment indicators and guide long-term investment. 2) The document proposes to "urgently promote the landing of the second batch of long-term stock investment pilot projects of insurance funds, and subsequently expand the range of participating institutions and the scale of funds". Directly setting up private securities investment funds for insurance funds can help reduce the impact of equity asset market value fluctuations on the net profit of insurance companies. Previously, China Life Insurance and New China Life Insurance jointly initiated the operation of China's first insurance private securities investment fund with a total size of 50 billion yuan, and the operation was smooth. In the future, more insurance private securities investment funds may appear, especially those with a higher proportion of equity investments, may have a stronger willingness. Regarding pension funds, the plan proposes to optimize the investment management mechanisms of national social security funds and basic pension funds, including increasing the proportion of national social security investments, increasing the scale of basic pension fund entrusted investments, and refining long-term performance assessments, etc. First, it is necessary to refine and clarify the mechanisms for the long-term performance assessment of national social security funds for five years or more and the basic pension fund investment operations for three years or more, and accelerate the introduction of guidance on long-term performance assessments for enterprise pension funds of three years or more. Second, to further expand the scale of entrusted investments of basic pension funds in areas where conditions permit. According to Economic Daily reports, as of the end of 2023, the scale of basic pension fund entrusted investments was 1.86 trillion yuan, which is relatively low. Third, steadily increase the proportion of equity assets in national social security funds. According to the website of the National Social Security Fund Council, as of 2023, the total assets of the national social security fund were 3 trillion yuan, with trading assets accounting for over 54% (not entirely stocks). Regarding public funds, the plan emphasizes the need to increase the scale and proportion of equity public funds. Public funds, as connectors serving the real economy and residents' wealth, vigorously developing equity funds helps optimize investor structure and better play the role of capital markets in optimizing resource allocation. In particular, with the increasing demand for residents' asset allocation and wealth management, the era of ETFs and investment advisors will gradually arrive. According to Wind data, currently ETFs in China account for only about 11.5% of the net asset value of all funds, and the bank predicts that the development process of passive management products may accelerate in the future. Regarding market ecology, the plan continues to emphasize increasing investor returns, following the market management guidelines previously issued by the China Securities Regulatory Commission. Although dividend and buyback efforts have significantly increased since 2024, there is still considerable room for improvement in the frequency of annual dividends, dividends before the Spring Festival, and buyback efforts. According to statistics from Yicai, since 2024, the total amount of dividends announced by Shenzhen-listed companies has amounted to 581.6 billion yuan (including dividends for 2023, mid-year dividends for 2024, etc.), an increase of 38% compared to 2023. About 500 companies have disclosed their mid-year dividend plans for 2024 (including special dividends), with an expected total dividend of 115.4 billion yuan, a significant year-on-year increase of 316% in the number of dividends and 298% in the amount. In addition, the plan indicates an increase in the use of stock repurchase and increase-and-mortgage tools, as well as further expanding the convenience of securities funds and insurance companies exchanging operations. According to statistics from Securities Times and the China Securities Regulatory Commission, approximately one hundred listed companies issued 256 announcements related to "repurchase and increase mortgage" in 2024, with a total loan amount ceiling of approximately 54 billion yuan, accounting for 37% of the total repurchase amount provided, and accounting for an additional 540 billion yuan. The second round of bidding for the 300 billion yuan loan with a first phase of 18% has been completed; the operation amount for the swap convenience is 55 billion yuan. In addition, the plan also emphasizes allowing public funds, commercial insurance funds, basic pension insurance funds, enterprise pensions funds, bank wealth management products, etc. to participate in the private placement of listed companies as strategic investors.Risk factors: Domestic policy timing or intensity, implementation effects are not as expected; Capital market reform falls short of expectations; Macroeconomic recovery falls short of expectations.