Play the role of "stabilizer" of long-term funds
2024-08-15
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The Decision of the CPC Central Committee on Further Deepening Reform and Promoting Chinese-style Modernization (hereinafter referred to as the Decision), which was reviewed and approved at the Third Plenary Session of the 20th CPC Central Committee, proposed to improve the capital market function of coordinating investment and financing, prevent risks, strengthen supervision, and promote the healthy and stable development of the capital market. Support the entry of long-term funds into the market. Industry insiders said that supporting the entry of long-term funds into the market will help improve the capital structure of the market, reduce market volatility, promote stable market development, and provide more funds for the development of the real economy.
Improving the stability of capital markets
Long-term funds generally refer to pension funds, social security funds, and insurance funds. These funds have relatively stable sources and long periods of use. They usually pursue long-term and stable investment returns, and can inject "live water" into the high-quality development of the capital market and ensure the steady development of the capital market. At the same time, in periods of high market volatility, long-term funds can help enhance the resilience of the market and reduce the impact of short-term capital flows.
The relevant person in charge of the Market Department of the China Securities Regulatory Commission said that the "Decision" proposed for the first time to improve the function of the capital market to coordinate investment and financing, which reflects the central government's new expectations and requirements for the positioning, function and role of the capital market under the new situation. In the future, capital market reform needs to pay more attention to the balance between investment and financing.
To promote the balanced development of investment and financing, the introduction of medium- and long-term funds is one of the keys. Experts said that on the investment side, it is necessary to improve services and returns to investors. We will encourage relevant parties to optimize market entry policy arrangements and clear system bottlenecks and pain points based on the characteristics of medium- and long-term funds such as insurance funds, social security funds, and pension insurance funds. We will support securities and fund operating institutions to launch more products and services that match medium- and long-term funding needs, better play the leading and exemplary role of industry institutions, and steadily promote the implementation of the fee rate reform of the public offering fund industry.
Li Zhan, chief economist of the research department of China Merchants Fund Management Co., Ltd., believes that the decision to support the entry of long-term funds into the market is based on the dual goals of improving the stability of the capital market and promoting the development of the real economy. "Long-term funds are stable, have low risk appetite, and have a long investment cycle. Focusing on value investment will help reduce short-term speculative behavior in the market, enhance the functions of market price discovery and resource optimization, and improve the rationality and stability of the market. At the same time, it will help broaden the source of funds in the stock market and provide fresh water for the financing of the real economy. The financing structure of domestic enterprises is still dominated by indirect financing, and the entry of long-term funds into the market will increase the proportion of direct financing. As a kind of 'patient capital', the investment attributes of long-term funds are suitable for high-growth industries and are an important driving force for the development of new quality productivity." Li Zhan said.
Chen Li, chief economist of Sichuan Securities, said that long-term funds can better inject "live water" into the real economy, promote the high-quality development of the real economy, and help implement the value investment concept of "patient capital" and better play the value discovery function of the stock market. At the same time, it is conducive to promoting the transformation of residents' savings into investment, increasing residents' property income, and realizing a virtuous cycle of the stock market, the real economy and residents' wealth.
Clearing system bottlenecks and pain points
Since last year, relevant departments have actively removed obstacles for long-term funds to enter the market by improving institutional arrangements. In September 2023, the State Financial Supervision and Administration Bureau issued the "Notice on Optimizing the Regulatory Standards for Insurance Company Solvency", guiding insurance companies to support the stable and healthy development of the capital market. For insurance companies investing in the constituent stocks of the Shanghai and Shenzhen 300 Index, the risk factor was adjusted from 0.35 to 0.3; for investing in ordinary stocks listed on the Science and Technology Innovation Board, the risk factor was adjusted from 0.45 to 0.4; and so on.
In October 2023, the Ministry of Finance issued the "Notice of the Ministry of Finance on Guiding Insurance Funds to Make Long-term and Stable Investments and Strengthening Long-term Assessments of State-owned Commercial Insurance Companies", further strengthening the long-term assessments of state-owned commercial insurance companies, and put forward relevant requirements for their investment management, encouraging them to make long-term investments, stable investments, and value investments.
In November 2023, the Ministry of Finance issued the "National Social Security Fund Domestic Investment Management Measures (Draft for Comments)", proposing that the maximum investment ratio of the social security fund in stock and equity assets can reach 40% and 30% respectively, and at the same time adjusted the investment scope of the social security fund.
In April this year, the State Council issued the "Several Opinions on Strengthening Supervision, Preventing Risks and Promoting High-Quality Development of the Capital Market" (hereinafter referred to as the "Opinions"), proposing to establish a market ecology that fosters long-term investment, improve basic systems that are suitable for long-term investment, and build a policy system that supports "long-term money and long-term investment."
The reporter noticed that the current situation of medium- and long-term funds entering the market has improved. Taking insurance funds as an example, the allocation of equity assets has shown an upward trend. According to data released by the State Financial Supervision and Administration Bureau, as of the end of June this year, the balance of insurance companies' funds was 30.87 trillion yuan. Among them, the balance of stock allocation of life insurance companies was about 1.94 trillion yuan, accounting for 7%, and the balance increased by 4.16% year-on-year. The balance of stock allocation of property insurance companies was about 137 billion yuan, accounting for 6.49%, and the balance increased by 6.69% year-on-year.
"The total amount of medium- and long-term funds in the capital market is still insufficient, the supporting mechanism is not perfect enough, and the policy environment of 'long-term money and long-term investment' has not been fully formed." Shen Bing, director of the Institutional Department of the China Securities Regulatory Commission, said that among them, public funds, as the representative of equity investment in the asset management industry, have a low proportion of equity products and insufficient market leadership; there is still room for improvement in the institutional environment of insurance funds and pension stock investments in terms of performance appraisal and investment operations.
Regarding the specific obstacles to long-term funds entering the market, Li Zhan believes that on the one hand, there are policy barriers. For example, the overall institutional assessment mechanism is short-term. Annuity funds, insurance funds, etc. generally have short-term assessment problems. The pressure of short-term assessment leads institutions to pursue short-term returns, which affects the performance of long-term funds and the concept of value investment cannot be implemented. On the other hand, the types of financial products on the market are limited, which makes it difficult to meet the diversified investment needs of long-term funds.
Chen Li also mentioned that long-term funds entering the market may face obstacles in the long-term assessment of investment returns. From the perspective of the coverage rate of the long-term assessment mechanism, there are still few institutions in the market with an assessment cycle of more than 3 years. Institutions should be further encouraged to establish a long-term assessment mechanism, and at the same time, build an assessment system that connects investment management institutions, investment managers, products and portfolios at multiple levels, and guide institutions to establish and improve management systems that are compatible with long-term assessments in all aspects.
From the perspective of further promoting the entry of insurance funds into the market, Li Zhan suggested that research should continue to be conducted to optimize the solvency indicators of insurance companies. Relevant departments need to comprehensively consider factors such as solvency indicators, financial indicator stability, and rigid cost requirements on the liability side, optimize the solvency supervision standards of insurance companies, appropriately expand the upper limit of equity asset investment ratios, and weaken the constraints of indicators on equity investment.
Public offerings should be the main force
Medium- and long-term funds with stable sources, standardized behavior and professional operation are one of the important foundations for building the inherent stability of the capital market. As an important institutional investor and long-term fund provider in the capital market, public funds have become an important force for market stability with their huge asset management scale and professional investment capabilities.
In recent years, the CSRC has focused on developing equity funds and worked with relevant departments to improve the institutional environment for medium- and long-term funds to participate in equity investment, and has achieved phased results. Data shows that by the end of 2023, various professional institutional investors held a total of 16 trillion yuan in A-share market value, more than doubling in five years, and the shareholding ratio increased from 17% to 23%. Among them, public funds held 5.1 trillion yuan in A-share market value, and the shareholding ratio increased from 4% to 7.3%, becoming the largest professional institutional investor in A-shares.
In the view of industry insiders, public funds, through long-term investment strategies, help to form a stable capital supply and provide stable financial support for the operation and development of enterprises. This long-term capital injection is not only conducive to the innovation and growth of enterprises, but also provides sustainable impetus for economic development. When the market fluctuates, public funds can use their financial advantages and professional judgment to conduct counter-cyclical operations, smooth market fluctuations, and play the role of market "stabilizer" and "ballast stone".
The Opinion also proposed to vigorously develop equity public funds and significantly increase the proportion of equity funds. Establish a fast approval channel for exchange-traded open-end index funds (ETFs) to promote the development of index investment. Chen Li suggested that public funds can take the initiative to update or expand their products. For example, they can explore and develop dividend products favored by long-term funds to further meet the investment needs of medium- and long-term funds.
Regarding the promotion of long-term investment and the development of equity investment, the relevant person in charge of Fullgoal Fund believes that, first, it is necessary to effectively improve investment research capabilities and provide more stable and reliable long-term investment performance. Second, it is necessary to implement long-term assessments to better achieve the consistency of long-term interests between fund managers and investors, so that "long-termism" runs through investment. Third, it is necessary to vigorously develop equity funds and insist on doing difficult but correct things. Fourth, it is necessary to improve the efficiency of index fund development, increase product innovation, and provide the market with more abundant tool products.
Bringing tangible benefits to investors is the key to attracting and retaining long-term funds. Relevant officials of E Fund Management believe that public fund managers should strive to enhance investors' sense of gain and promote the formation of a virtuous cycle of investment and financing. On the one hand, they should adhere to value investment, long-term investment and rational investment, continuously optimize and iterate the investment research method system at the macro, meso and micro levels, actively explore scientific investment methods, and continuously improve forward-looking layout and valuation pricing capabilities; on the other hand, they should improve the investor service accompaniment system that is deeply integrated online and offline to help investors improve their investment cognition, optimize investment behavior, strengthen portfolio allocation, and improve investment experience. (Economic Daily reporter Ma Chunyang)
