How much medium and long-term capital will enter A shares? Multiple securities firms provide comprehensive interpretations.

The highly anticipated press conference held by the State Council Information Office on January 23 proceeded as scheduled, focusing on the efforts to promote the entry of medium and long-term funds into the market and promote the high-quality development of the capital market. Just the day before, the "Implementation Plan for Promoting the Entry of Medium and Long-Term Funds into the Market" was released, marking further progress in the establishment of the long-term fund entry system. From a long-term perspective, the consensus is clear, from the joint issuance of the "Guiding Opinions on Promoting the Entry of Medium and Long-Term Funds into the Market" by the Central Financial Office and the China Securities Regulatory Commission, to the "Implementation Plan", and the various statements, work arrangements, and plans made at the State Council press conference on January 23, a series of policy measures are conducive to further promoting the entry of medium and long-term funds into the market, improving the funding situation of A-shares, boosting market sentiment, and promoting the smooth operation of the capital market, enhancing market pricing efficiency, and creating a healthy, high-quality development of the capital market ecosystem. Southwest stated that with the implementation of specific measures, it is expected that medium and long-term funds will play a key role as a "ballast" in the capital market. Institutional funds are large in scale, stable in source, and have a long investment cycle, tending to seek long-term stable returns, not easily withdrawing due to short-term fluctuations in the market, and can increase holdings of high-quality assets in reverse, to suppress market overselling, smooth out volatility, and enhance market resilience and risk resistance. Galaxy Securities Research believes that the entry of medium and long-term funds into the market marks the beginning of reform. The "Implementation Plan" responds to the structural problems facing China's capital market, promoting structural optimization of the capital market from a top-level design, reflecting China's determination to further open up and deepen reforms of the capital market. Specifically, the "Implementation Plan" includes various measures: firstly, increasing the proportion and stability of A-share investments by commercial insurance funds; secondly, optimizing the investment management mechanism of the national social security fund and basic pension insurance fund; thirdly, improving the market-oriented operation level of enterprise (occupational) annuity funds; fourthly, increasing the size and proportion of equity funds; fifthly, optimizing the investment ecosystem of the capital market. Sun Jinju, Vice President and Director of Research at Open Source Securities, said that the comprehensive deepening of capital market reforms by 2025 will further push forward, especially in deepening the comprehensive reform of capital market investment and financing, opening up the entry points and bottlenecks of medium and long-term funds into the market, and enhancing the inclusiveness and adaptability of the capital market system. At the State Council press conference on January 23, the Chairman of the China Securities Regulatory Commission, Wu Qing, said that promoting the entry of medium and long-term funds into the market is a systematic project. Combining the content of the plan and the news conference, including communication with the securities and fund industry and market participants, only a preliminary estimation of incremental funds can be made, implementing the requirements of the "Implementation Plan," it is expected that each year will bring more than one trillion yuan of incremental funds to the A-share market, in line with expectations. The Western strategic research stated that removing the barriers to the entry of long-term funds into the market has become an important task for the improvement of our country's capital market construction, and the entry of medium and long-term funds into the market is expected to accelerate in the future. Optimistic about the reform trend of the A-share capital market, high-quality state-owned enterprises, and new productive forces are expected to undergo long-term value revaluation. The Guo Jun Non-bank Financial Team expects that policies to drive insurance, social security, basic pension, and enterprise (occupational) pension and other medium and long-term institutional funds into the market will continue to be introduced and implemented, bringing incremental funds to the capital market. Several departments mentioned at the State Council press conference that in the follow-up implementation process, they will continue to strengthen communication and cooperation, and enhance tracking and effectiveness. Detailed information on various meetings and policies provides three key points for interpretation: Interpretation 1: Helping insurance funds better leverage their long-term fund properties Medium and long-term funds include sovereign wealth funds, social security, pension insurance, enterprise pension, and public funds. In 2023, the balance of insurance funds in China reached 28.16 trillion yuan, with stock and securities investment amounting to 3.3 trillion yuan, accounting for 12%, an increase of approximately 1.8 percentage points from 2013, indicating great potential for improvement. Enterprise pension funds are also developing rapidly, with a cumulative fund size of over 3 trillion yuan. In addition, public funds and private equity funds continue to play a crucial role. According to data from the China Securities Investment Fund Industry Association, by the end of 2024, the scale of public funds had surpassed 32.8 trillion yuan, with stock and hybrid funds reaching 7.96 trillion yuan; there were over 20,000 surviving private equity fund managers, collectively managing funds totaling nearly 20 trillion yuan. The "Implementation Plan" will help insurance funds better leverage their long-term fund properties. One key focus of the plan is to revise the long-term performance assessment system for state-owned insurance companies. The plan proposes that "state-owned insurance companies will be subject to a comprehensive performance assessment of three years or more, with the net return on equity not accounting for more than 30% of the assessment weight for the current year and the three to five-year cycle indicators accounting for no less than 60% of the weight." Market participants mentioned that this time, the main focus is on reducing the weight of the indicators for the current year, further optimizing the long-term assessment indicators, and guiding long-term investments. The CICC research team believes that the revision of the assessment method for state-owned insurance companies in the "Implementation Plan" will help insurance funds make investment decisions from a longer-term perspective, and other supporting measures will help optimize the capital market ecosystem, improve the long-term investment returns of insurance funds, and help them better leverage their long-term fund properties. At this press conference, one of the highlights was the announcement by China Securities Regulatory Commission Chairman Wu Qing that, in addition to the existing basis, large state-owned insurance companies would be encouraged to increase their investment in A-shares. Starting in 2025, 30% of the newly added premiums would be used for A-share investments. According to the latest calculations by Founder Securities, assuming premium growth rates of 0% to 10% and A-share investment ratios of 15% to 30%, calculated based on new premiums, considering that the premium scale of large listed top insurance companies is close to 2.5 trillion yuan annually, this is expected to bring 370-830 billion yuan in incremental funds to the A-share market; calculated based on new single premiums, with the new single premium scale of large listed top insurance companies close to 600 billion yuan annually, this is expected to bring 100-220 billion yuan in incremental funds to the A-share market. As of the end of August 2024, the total holding of A-share market value by professional institutional investors, including insurance funds, approached 15 trillion yuan, more than doubling from the beginning of 2019, with the proportion of A-share market value to market value increasing from 17% to 22%. Additionally, according to Xiao Yuanqi.Latest data shows that insurance funds currently have over 4.4 trillion yuan invested in stocks and equity funds. From the perspective of insurance companies' fund utilization, investments in stocks and equity funds account for 12%, while investments in unlisted company equities account for 9%. Market insiders believe that there is still significant room for improvement.GF Securities research believes that increasing the proportion and stability of commercial insurance funds in the A-share market investment can help alleviate market volatility, provide continuous long-term funding support, and promote the formation of a more stable investment structure in the market, laying a solid foundation for high-quality economic development. The calculation is as follows: Chen Fu, chief analyst of non-bank at GF Securities, said that under controllable risks, insurance funds are expected to increase equity assets to cope with the low interest rate environment. Currently, the equity allocation ratio of insurance funds (stocks + funds + long-term equity investments) is 20.4%, and the industry's solvency adequacy ratio is 197.4%. The corresponding equity allocation ceiling is 25%, while the solvency adequacy ratio of listed insurance companies is generally above 200%, indicating room for improvement in both the scale and actual allocation ratio of equity allocations. According to the calculations by Zhongrong non-bank financial services, if the compound growth rate of insurance funds utilization balance increases by 8%-10% in the next 3 years, and the proportion of stocks and funds increases to 13%-15%, the balance of insurance funds invested in stocks and funds in 2027E will reach 5.32-6.49 trillion yuan, with an average annual increase of about 0.39-0.78 trillion yuan. The non-bank financial team at Huachuang Securities calculated that each 1% increase in equity allocation of insurance funds corresponds to approximately 321.5 billion yuan of incremental funds. If the actual allocation ratio is calculated at 23.5%-24%, there is approximately 785.4 billion to 946.1 billion yuan of incremental equity asset allocation space. Guojin Xia Changsheng team conducted a simple calculation and estimated that if the equity allocation of the insurance industry increases by 1%, considering only the existing increase, it is expected to bring over 300 billion yuan of incremental funds to the stock market for the whole year. The volume of market funds will be even higher when new premiums flow in and asset re-allocation upon maturity. If the proportion of high dividend stocks in stocks + equity funds increases by 10%, the incremental funds in the high dividend industry are expected to exceed 400 billion. According to the calculations by Zheng Jisha, an analyst at CMB Non-bank, in the medium-term scenario, the growth rate of insurance industry fund utilization balance is expected to be about 10% by 2025, corresponding to a scale of about 35 trillion yuan. If the proportion of stocks and securities investment funds increases to around 14%, the corresponding increment is about 700 billion. Moreover, it was mentioned that efforts will be made to accelerate the landing of the second batch of long-term stock investment pilot projects by insurance funds, with a scale of no less than 100 billion yuan, and will gradually expand in the future. It is understood that there was approval before the Spring Festival for a 500 billion yuan investment in the stock market. The "Implementation Plan" proposes to "accelerate the landing of the second batch of long-term stock investment pilot projects by insurance funds, and gradually expand the scope of participating institutions and the scale of funds." It can be seen that the establishment of private securities investment funds by insurance funds can help reduce the impact of fluctuations in equity asset market value on the net profit of insurance companies. The team from CITIC Securities pointed out that the operation of China's first insurance private equity securities investment fund, jointly initiated by China Life Insurance and New China Life Insurance with a total scale of 50 billion yuan, is proceeding smoothly. In the future, more insurance private equity securities investment funds may emerge, especially if insurance funds with a higher proportion of equity investments may have a stronger willingness. Interpretation 2: Expand stable sources of capital for the financial market It is worth noting that the "plan" optimizes the investment management mechanism of the National Social Security Fund and the basic endowment insurance fund, and improves the market-oriented operation level of enterprise (employee) pension funds, which is expected to enhance the scale of long-term funds entering the market. The plan aims to unleash the huge potential of long-term funds by optimizing the investment management mechanisms of the National Social Security Fund and the basic endowment insurance fund. Increasing the proportion of equity assets of these two types of funds steadily will not only help improve the long-term capital supply of the capital market but also ensure that these funds operate more professionally and market-oriented through performance assessments of five years and more than three years. This measure not only enhances the risk resistance of the capital market but also meets the strategic needs of ensuring people's livelihood and promoting stable economic growth in the context of an aging society. Improving the market-oriented operation level of enterprise (employee) pension funds will further promote the long-term flow of funds. As the source of large long-term funds, the market-oriented operation of enterprise pension funds will inject more abundant funds into the capital market, promoting the efficient allocation of financial resources. This measure helps diversify the sources of capital in the capital market and encourages enterprise pension fund managers to engage in differentiated investments, enhancing their overall contribution to the capital market. It is worth noting that for life insurance companies, the business model of "long-term liabilities, short-term investments, high leverage" contains high requirements for the level of asset-liability matching in the face of interest rate risks and market risks. The degree of asset-liability matching will affect the company's real financial and operational stability when facing market fluctuations. Further research is needed on how to manage the corresponding risks. Under this constraint, insurance funds may tend to increase their holdings of undervalued, high dividend, and low volatility equity assets. The team at Minsheng Non-Bank also pointed out that the main difficulties and challenges for insurance funds in equity investments include the profit fluctuation brought about by the new accounting standards, constraints on the upper limit of equity investment due to solvency adequacy ratio, and periodic assessment system. This plan reflects the determination and confidence of the top leadership to promote medium and long-term funds. It is believed that the support for the plan is expected to further adjust and improve on the problems in the practical operation of insurance funds, and the proportion of equity allocation of insurance funds is expected to gradually increase. In the current background of declining interest rates, increasing the proportion and stability of equity investments is helpful for insurance companies to cope with potential interest rate spread risks and better leverage their long-term funds and patient capital attributes, thereby facilitating asset-liability matching. Southwest believes that medium and long-term funds are expected to play a better role as a close link between the capital market and the real economy, guiding the optimal allocation of financial resources and directing long-term funds to flow accurately to entities with development potential and in line with the national strategic direction, such as high-end manufacturing, technology innovation enterprises, and green energy industries. Interpretation 3: Create a healthy ecological transformation of the capital market from a "speculative market" to an "investment market" Optimizing the investment ecology of the capital market is one of the overall layouts of the "plan." Overall, by guiding listed companies to increase their share buyback efforts and implementing multiple dividend policies, the plan injects more vitality and confidence into the market. The introduction of strategic investors, especially public funds and commercial insurance funds, will bring more vitality and confidence to the market. The entry of strategic investors, especially public funds and commercial insurance funds, injects more vitality and confidence into the market. By steadily increasing the proportion of equity assets of these two types of funds, not only can the long-term capital supply of the capital market be improved, but also through performance evaluations of five years and more than three years, ensure that these funds are more professional and market-oriented. This measure not only enhances the risk resistance of the capital market, but also meets the strategic needs of ensuring people's livelihood and promoting stable economic growth in the context of an aging society. By improving the market-oriented operation level of enterprise (employee) pension funds, it will further promote the flow of long-term funds. As the source of large long-term funds, the market-oriented management of enterprise pension funds will inject more abundant funds into the capital market and promote the efficient allocation of financial resources. This measure helps diversify the sources of capital in the capital market, while encouraging enterprise pension fund managers to engage in differentiated investments, enhancing their overall contribution to the capital market. It is worth noting that life insurance companies, with their commercial model of "long debts, short investments, high leverage," have high requirements for asset-liability matching in the face of interest rate and market risks. The degree of asset-liability matching will affect the company's financial and operational stability when facing market fluctuations. Further research is needed to manage these risks effectively. Under these constraints, insurance funds may tend to increase their holdings of undervalued, high dividend, and low volatility equity assets. The team at Minsheng Non-Bank also pointed out that the main difficulties and challenges for insurance funds in equity investments include the profit fluctuation brought about by the new accounting standards, constraints on the upper limit of equity investment due to solvency adequacy ratio, and periodic assessment system. This plan reflects the determination and confidence of the top leadership to promote medium and long-term funds. It is believed that the support for the plan is expected to further adjust and improve on the problems in the practical operation of insurance funds, and the proportion of equity allocation of insurance funds is expected to gradually increase. In the current background of declining interest rates, increasing the proportion and stability of equity investments is helpful for insurance companies to cope with potential interest rate spread risks and better leverage their long-term funds and patient capital attributes, thereby facilitating asset-liability matching. Southwest believes that medium and long-term funds are expected to play a better role as a close link between the capital market and the real economy, guiding the optimal allocation of financial resources and directing long-term funds to flow accurately to entities with development potential and in line with the national strategic direction, such as high-end manufacturing, technology innovation enterprises, and green energy industries.Gold is entering the phase of targeted issuance, which will further enhance the liquidity and transparency of the capital market, providing more convenience for corporate financing. At the same time, the increased convenience of exchange between securities, funds, insurance institutions, etc., will enhance market liquidity and facilitate efficient allocation of market resources. Galaxy Securities research points out that this creates a healthy ecology for the capital market to transition from a "speculative market" to an "investment market".The reporter noticed that there is also a lot of discussion on the public offering side, mainly focusing on the following points: stock allocation is gradually moving towards passivity, mainly manifested in tracking indices or implementing index enhancement strategies, and returns are showing an increasingly balanced trend; due to the impact of reduced costs, fund sales are expected to accelerate towards the internet channels, which is a positive development for e-commerce platforms and live streaming platforms; and the research capabilities of buyers are expected to increase. Regarding securities companies, the CICC research team believes that considering the improvement in policy expectations from top to bottom, boosting investor confidence and risk preference recovery, and at the same time, a series of capital market reforms such as "promoting the entry of medium and long-term funds" continue to deepen. This is expected to improve market trading activity in the short term, and promote the expansion and upgrading of brokerage business in the medium to long term. Under the requirements of external supervision and internal transformation of securities firms, the industry is moving towards a new stage of high-quality development. This article is reprinted from "Cai Lian She", GMTEight editor: Li Fo.