CITIC SEC: Continues the established direction of capital market reform and encourages the entry of medium and long-term funds through multiple channels.

CITIC SEC released a research report stating that the implementation of the "Implementation Plan for Promoting the Entry of Medium- and Long-Term Funds into the Market" since September 2024 is a specific implementation of the established direction of capital market reform. Focusing on promoting the entry of medium- and long-term funds into the market and optimizing the core goal of the capital market ecosystem, this reform has made clear plans to enhance the willingness of funds to enter the market, stabilize market returns, lock in the attributes of medium- and long-term funds, and expand the base of medium- and long-term funds. With the gradual implementation of subsequent detailed rules, medium- and long-term funds are expected to play a more important role in the long-term and healthy development of the capital market. Event: 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 China Banking and Insurance Regulatory Commission jointly issued the "Implementation Plan for Promoting the Entry of Medium- and Long-Term Funds into the Market" (hereinafter referred to as the "Implementation Plan"). The plan focuses on guiding commercial insurance funds, the national social security fund, the basic pension insurance fund, enterprise annuity funds, and public funds to increase their entry into the market. CITIC SEC's main points are as follows: Follow the established direction of capital market reform, look forward to subsequent detailed rules On September 24, 2024, the Central Financial Office and the China Securities Regulatory Commission issued the "Guiding Opinions on Promoting the Entry of Medium- and Long-Term Funds into the Market," clarifying the three core directions of the reform: building a capital market ecosystem that encourages long-term investment; vigorously developing equity public funds to support the stable development of private equity funds; and improving various supporting policies for the entry of medium- and long-term funds into the market. The implementation of this "Implementation Plan" further clarifies the macro direction established in the previous "Guiding Opinions," and it is expected that the subsequent entry of medium- and long-term funds into the market will be further implemented around the release of multiple detailed rules, thereby systematically promoting the development of the capital market. This implementation plan focuses on promoting the entry of medium- and long-term funds into the market and optimizing the capital market ecosystem from five aspects: 1) The proportion and stability of A-share investments by commercial insurance funds. Encourage large state-owned insurance companies to increase their investment in A shares (including equity funds) and their actual proportion. State-owned insurance companies are subject to a comprehensive evaluation of their operational performance for a period of more than three years, with the net asset return rate accounting for no more than 30% of the assessment weight in the current year, and the three to five-year cycle index accounting for no less than 60% of the weight. Expedite the implementation of the second batch of 100 billion yuan trial project for long-term equity investment of insurance funds, gradually expanding the scope of participating institutions and the scale of funds. 2) Optimize the investment management mechanism of social security and pension funds. Steadily increase the proportion of stock investments in the national social security fund and further expand the entrusted investment scale of basic pension insurance funds in areas where conditions permit. Clarify the long-term performance evaluation mechanism of the national social security fund in excess of five years and the investment operations of basic pension insurance funds in excess of three years, and support the National Social Security Fund Council in fully leveraging its professional investment advantages. 3) Improve the market-oriented investment operation level of enterprise annuity funds. Accelerate the issuance of guidelines for performance assessment of enterprise annuity funds for over three years. Gradually expand the coverage of enterprise annuities. Encourage enterprise annuity fund managers to engage in differentiated investments. 4) Increase the scale and proportion of equity funds. Strengthen the supervision and evaluation constraints, optimize the product registration mechanism, and guide and urge public fund managers to steadily increase the scale and proportion of equity funds. Establish a mechanism to bind the interests of fund managers, fund managers, and investors. Promote the implementation of operating rules for private equity funds, legally expand the types and investment strategies of private equity funds. 5) Optimize the investment ecosystem of the capital market. Encourage listed companies to increase stock repurchase efforts and implement a policy of multiple dividends within one year. Promote listed companies to increase the use of stock repurchase and holding, and further expand the scale of convenient operations between securities funds and insurance companies. Allow public funds, commercial insurance, pension insurance, enterprise annuities, and bank wealth management to participate as strategic investors in non-public offerings. In terms of participating in new stock subscription, listed company non-public offerings, and shareholding identification standards, equal policy treatment is given to bank wealth management, insurance asset management, and public funds. Further expand the scale of convenient operations for exchanging securities, funds, and insurance companies. We believe that the impact of the reform on the capital market is mainly reflected in the following three aspects. Extending the evaluation cycle to increase the willingness and capacity of insurance funds to enter the market As of the end of November 2024, the balance of insurance fund investment assets was 31 trillion yuan, with a year-on-year growth rate of more than 10%, of which the proportion of equity assets was 21% (stocks + fund assets accounted for 13%, and long-term equity investments accounted for 8%); we expect insurance funds to remain the main source of incremental funds for the capital market in 2025. Insurance funds are generally facing the challenge of a low-interest rate environment, and increasing the proportion of equity assets is a realistic choice. Extending the evaluation cycle and increasing the proportion of A-share investments by state-owned insurance companies will help improve the asset return rate and holding stability of insurance funds. In addition, insurance funds also need to further reduce predetermined interest rates, increase the proportion of dividend insurance and universal life insurance, and start transformation from the liability side to improve the capacity of asset-side equity asset capacity. Optimizing the market ecosystem to increase long-term returns and stability of market-entry funds Encouraging listed companies to increase stock repurchase efforts and implement a policy of multiple dividends within one year will help insurance funds better achieve asset-liability matching and meet customer cash return needs. Promoting listed companies to increase the use of stock repurchase and holding, and further expand the scale of convenient operations between securities funds and insurance companies, will benefit market stability and increase the long-term holding willingness of insurance, social security, and pension funds. Locking in the medium- to long-term nature of institutional funds, expanding the base of medium- and long-term funds In this reform, various types of institutional funds are subject to equal treatment to banks, insurance funds, and public funds in areas such as new stock issuances, targeted increases, and shareholdings. Various institutional funds, as strategic investors and large shareholders in IPO targeted increases and other areas, will maintain longer holding periods and be subject to stricter reduction constraints, ensuring the medium- to long-term nature of market-entry funds through multiple channels. At the same time, on the basis of the participation of 40 financial institutions and over 300 listed companies, the coverage of exchange facilities and refinancing businesses will be further expanded. With the wide participation of market institutions, it is expected that the first batch of 800 billion yuan in exchange facilities and refinancing funds will be fully utilized on the basis of the initial 105 billion yuan and 60 billion yuan.The implementation of the "Guidelines for the Entry of Long-term Funds into the Market" is expected to benefit the insurance industry by optimizing the capital market ecosystem, maintaining strong beta characteristics. It is recommended to allocate balanced investments to major listed insurance companies.Similar to 2024, it is expected that the liability side of life insurance companies will continue to benefit from the anticipated interest rate cuts and potential reduction in guaranteed interest rates, as well as from the reshuffling of the bancassurance market; the asset side will continue to face challenges from low interest rates, strengthening equity asset allocation, and demonstrating good investment return elasticity. With the dual impact of a rebound in market turnover in the fourth quarter of 2024 and a not high year-on-year base, the significant improvement in the securities industry performance growth rate is expected to be confirmed multiple times in the earnings pre-increase season in January, the annual report season at the end of March, and the first quarter report season at the end of April. Brokerage and proprietary trading business have become the core sources of performance elasticity. Mergers and acquisitions are expected to further strengthen the sector's beta characteristics. Risk factors: risks of real estate industry recovery falling short of expectations, further interest rate declines, stock market corrections, market turnover contraction risks, and exposure to credit business impairment risks.