On September 24, 2024, at a press conference held by the State Council Information Office, Pan Gongsheng, the Governor of the People's Bank of China, announced two significant structural monetary policy tools: First, the creation of a swap facility for securities, funds, and insurance companies to support eligible institutions in obtaining liquidity from the central bank through asset collateralization; Second, the establishment of a special re-lending facility for stock buybacks and share increases, guiding banks to provide low-cost loans to listed companies and major shareholders to support stock buybacks and share increases. In addition to these short-term measures, relevant departments such as the China Securities Regulatory Commission have formulated the "Guiding Opinions on Promoting Medium and Long-term Capital into the Market," which requires a more comprehensive strategy to promote medium and long-term capital into the market. The policy level's attitude towards encouraging capital to enter the market is very positive and clear, but the willingness of medium and long-term capital to enter the market is often "not satisfactory."
Why is the proportion of long-term capital entering the market so low?
The proportion of equity investment in our country's pension funds and insurance funds is only 10% to 20%, far below the international level of about 50%, and also far from the upper limits of social security funds at 40% and insurance funds at 45% stipulated by our country's policies. At the same time, in the asset allocation of our country's insurance funds and social security funds, the investment returns of bonds, deposits, and equity are relatively stable, while the allocation to stocks, funds, and other equity classes is too "conservative." This difference shows that our country's long-term capital has insufficient participation in the equity market, which is not conducive to financial market risk prevention, global factor attraction, and dealing with the accelerated aging of the population and residents' pension security.
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Taking the National Social Security Fund (Social Security Fund) as an example, from 2018 to 2020, after the A-share market went through three steps to complete the inclusion of 20% weight in the MSCI Emerging Market Index, the passive channel for international medium and long-term funds to enter the A-share market was opened. The Ministry of Finance announced and implemented the "Interim Measures for the Investment Management of the National Social Security Fund" in December 2021, further clarifying the upper limit of the Social Security Fund's investment in stocks and funds to 40%, and further giving the Social Security Fund greater investment flexibility. Although the proportion of equity allocation of the Social Security Fund has not been disclosed, it can be seen from its annual financial statements that its equity allocation ratio does not seem to have increased significantly after 2021.
From 2020 to 2022, although the total scale of the Social Security Fund decreased from 29.2 trillion to 28.8 trillion, the overall decline (1.34% or 0.04 trillion yuan) is not significant compared to the overall scale (nearly 3 trillion yuan). It is observed that the proportion of "trading financial assets" in the Social Security Fund's statements increased from 48.32% in 2020 to 55.10% in 2021, and decreased to 51.81% in 2022. This indicates that the Social Security Fund significantly increased its participation in the short-term favorable market, but quickly reduced it in the weak market, but the overall proportion of trading financial assets did not increase with the increase of the upper limit of equity investment.
At the same time, as another important source of medium and long-term capital, the situation of insurance funds entering the market is also worth paying attention to. According to the data of the Financial Regulatory Authority, in 2021, the balance of insurance funds used reached 23.23 trillion yuan, of which the proportion of investment in stocks and funds was 12.70%, and the comprehensive yield distribution of the insurance industry was mainly concentrated within 5.5%. In 2022, the balance of insurance funds used increased to 25.05 trillion yuan, with the proportion of investment in stocks and funds being 12.71%, and the comprehensive yield distribution of the insurance industry was mainly concentrated within 3%. In 2023, the balance of insurance funds used reached 27.67 trillion yuan, of which the proportion of investment in stocks and funds was 12.02%, and the comprehensive yield was 4.02%.
These data indicate that both the Social Security Fund and insurance funds show a very cautious attitude towards entering the market in the face of market fluctuations, and their equity investment ratio has remained at a low level and has a downward trend. Since the Social Security Fund is the livelihood money of the people, and insurance funds or enterprise annuities have the pressure of rigid expenditure every year, they will inevitably choose low-risk high dividend or fixed income investment varieties.
This phenomenon also shows that our country's long-term capital has insufficient participation in the equity market. Compared with the equity investment ratio of the Japanese Government Pension Investment Fund (GPIF) close to 50% and the Canada Pension Plan Investment Board (CPPIB) exceeding 60%, our country's long-term capital's willingness to enter the market is more cautious and conservative. This trend is not conducive to playing the role of long-term capital as a market stabilizer to a certain extent, and it is also unable to fully utilize the function of the capital market to serve the real economy and help the economy transform and upgrade. Looking further into the future, as the process of population aging accelerates and the pressure of residents' pension security continues to increase, if medium and long-term capital cannot actively participate in the capital market and obtain long-term investment returns, it may be difficult to cope with future challenges.
Market liquidity tools may be a "double-edged sword."
There are still some deep-seated structural contradictions and problems in our country's capital market, which to a certain extent restrict the enthusiasm of medium and long-term capital to enter the market. The main manifestations are: First, the volatility of the stock market is large, the quality of listed companies is uneven, and the concept of value investment has not yet taken root in people's hearts, making long-term capital lack confidence in the equity market; Second, the system construction of the bond market is relatively lagging behind, credit risk events occur from time to time, and the configuration demand of institutions such as insurance and pension funds is suppressed; Third, in the fields of derivatives and alternative investments, there is still a significant gap between our country and mature markets, which cannot meet the risk management and asset allocation needs of long-term capital.Facing the insufficient willingness of medium and long-term funds to enter the market in our country, the China Securities Regulatory Commission (CSRC) and other relevant departments have formulated the "Guiding Opinions on Promoting the Entry of Medium and Long-term Funds into the Market". The document focuses on three main measures: vigorously developing equity-oriented public funds, improving the institutional environment for "long money for long-term investment", and continuously improving the ecological environment of the capital market. Specifically,
Firstly, there is a strong emphasis on the development of equity-oriented public funds. The focus is on urging fund companies to further correct their business philosophy, adhere to investor return orientation, and strive to enhance investment research and service capabilities. Efforts are made to create more products that meet the needs of the general public and work hard to create long-term returns for investors. The CSRC will further optimize the registration of equity fund products, vigorously promote the innovation of index products such as broad-based ETFs, and introduce more ETF fund products including those for small and medium-sized plates like the ChiNext and STAR Market in a timely manner. This will better serve investors and contribute to national strategies and the development of new quality productive forces.
Secondly, the aim is to improve the institutional environment for "long money for long-term investment". The focus is on increasing regulatory tolerance for the equity investment of medium and long-term funds and fully implementing long-term assessments of more than three years. It is necessary to remove institutional barriers affecting the long-term investment of insurance funds, encourage insurance institutions to be steadfast value investors, and provide stable long-term investment for the capital market. At the same time, guide the multi-level, multi-pillar pension security system to interact positively with the capital market, improve the investment policy and system of the National Social Security Fund and basic pension insurance funds, and encourage enterprise annuity funds to explore different types of differentiated investments according to the different ages and risk preferences of the holders.
Thirdly, there is a continuous effort to improve the ecological environment of the capital market. The focus is on taking various measures to improve the quality and investment value of listed companies, and to improve the supporting institutional arrangements for institutional investors to participate in the governance of listed companies. At the same time, crack down on all kinds of illegal and irregular behaviors to create a good market ecology where medium and long-term funds "are willing to come, stay, and develop well".
These measures complement the swap convenience policies, jointly creating favorable conditions for incremental funds to enter the market. Essentially, whether it is creating securities, funds, insurance companies' swap convenience, or creating stock repurchase, and increasing special re-lending for shareholding, these two important structural monetary policy tools aim to provide more liquidity support for the capital market.
On the one hand, they can provide "market rescue" tools for institutions when the market experiences a sharp decline and liquidity risk, improving the efficiency of crisis response, preventing systemic risk, maintaining market stability, and boosting investor confidence. As Governor Pan Gongsheng said, the purpose of establishing these two tools is to form a multi-level, widely covered financial market stability tool system, and to play a counter-cyclical adjustment role.
Taking the swap convenience tool as an example, the biggest advantage of this tool is to enhance the market's emergency response capability. When there is a sharp decline and liquidity risk, this policy can provide institutions with greater market rescue efforts, greatly improving the efficiency of crisis response. This not only helps to prevent systemic risk and liquidity risk, maintain the medium-term stability of the capital market, but also sends a positive signal to the market and boosts investor confidence.
However, on the other hand, we must also see that no market rescue tool is omnipotent and still has a "double-edged sword" effect. The most significant is the potential to exacerbate the market's "helping to rise and fall" effect. When the market sentiment is excited, institutions may take the opportunity to significantly increase leverage, leading to excessive market gains; and when the market falls, institutions may be unwilling to use this policy to increase positions due to pessimistic sentiment, failing to achieve the purpose of stabilizing the market. This frequent significant fluctuation may not be conducive to the long-term stable growth of the market and is not conducive to forming the ideal "slow bull" market.
In addition, if used improperly, it may lead to the transfer of financial risks of financial institutions to the banking system, increasing the overall risk of the financial system.
Therefore, while these short-term policies play the role of a "fire extinguisher", they also need strict supporting mechanisms to prevent the spillover of risks. From a deeper level, the frequent introduction of market rescue policies reflects that the ecological environment of our country's capital market is not yet healthy, and the internal stability mechanism is not yet perfect. Faced with a complex and changeable external environment and arduous and heavy reform and development tasks, relying solely on short-term policies for "blood transfusion" is difficult to fundamentally solve the market's structural contradictions. We must improve the multi-level market system, especially to vigorously develop a professional and market-oriented institutional investor team. Among them, cultivating and strengthening the strength of medium and long-term funds such as pension funds and insurance funds is a crucial link.
There is a lot of room for improvement for long-term funds to enter the stock market.In fact, nurturing and strengthening the forces of medium and long-term funds such as pension funds and insurance capital often play a pivotal role in mature markets. Taking pension funds as an example, the asset size managed by U.S. public pension funds is approximately $4.5 trillion; while the scale of private pensions also reaches $35.4 trillion, equivalent to 1.3 times the U.S. GDP. In Japan and Canada, the proportion of pension assets to GDP is also as high as 63% and 92%, respectively. These massive, long-duration funds are not only important participants in multi-level markets such as stocks and bonds but also play a unique role as "ballast stones" and "stabilizers" with their prudent investment philosophy and professional investment research capabilities.
Moreover, overseas long-term funds also have many aspects worth learning from in terms of the use of investment tools, risk management, and asset allocation. Taking U.S. pension funds as an example, according to data from Pensions & Investments, as of the end of 2022, more than half of the 200 largest U.S. pension funds used derivatives such as stock index futures, interest rate swaps, and credit default swaps to hedge against inflation, interest rate, and credit risks. At the same time, the average allocation of these funds to alternative areas such as private equity, real estate, and infrastructure has also reached 26%, nearly 10 percentage points higher than 10 years ago.
Looking at Europe, pension funds in countries such as the Netherlands, Switzerland, and the United Kingdom have taken diversified and global asset allocation to the extreme. Taking the Netherlands as an example, with its well-developed financial infrastructure and open capital markets, the proportion of foreign investment in Dutch pension funds is as high as over 80%, with equity assets accounting for more than 50%, and fixed income also has nearly 40% allocated overseas, fully diversifying geopolitical and exchange rate risks, and capturing investment opportunities from a global perspective.
The successful practices of long-term funds in these developed markets rely not only on sound top-level design and institutional arrangements but also on open and efficient multi-level capital markets. It is also inseparable from the concerted efforts of all market participants to jointly create an ecosystem where "each beauty appreciates its own beauty and the beauty of others." In contrast, China still needs to put more effort into optimizing institutional supply, innovating product tools, strengthening risk control capabilities, and improving market ecology to fully unleash the vitality of long-term funds.
For example, international pension institutions such as the Government Pension Investment Fund (GPIF) of Japan and the Canada Pension Plan Investment Board (CPPIB) have adopted more active investment strategies and have achieved significant results in asset allocation diversification and risk management. For instance, as of 2022, the proportion of equity investments in GPIF is close to 50%, while the proportion of equity investments (including public markets and private equity) in CPPIB is even over 60%.
In addition to the "three major measures" introduced by the China Securities Regulatory Commission in the "Guiding Opinions on Promoting the Entry of Medium and Long-Term Funds into the Market," more strong reform measures can be taken in the future to further expand the investment channels of long-term funds, enrich risk management tools, and improve assessment and incentive mechanisms. Drawing on these international experiences, to unleash the vitality of China's long-term funds and promote high-quality development of the capital market, we can first consider expanding the scope of "tools" used by long-term funds.
Recommendation One:
Expand the scope of investment tools for long-term funds
In response to the current investment preference of China's long-term funds that "focus on bonds and neglect equity," it is recommended to further expand the scope of investment tools for pension funds and optimize risk hedging strategies. Currently, the investment tools for long-term funds such as pension funds and insurance funds in China are relatively limited, which to some extent restricts their risk management capabilities and investment flexibility. In contrast, leading international pension institutions have more experience in this area that can be learned from. Japan's GPIF allows the use of derivatives such as stock index futures and Treasury futures for hedging, which enables GPIF to better manage investment portfolio risks. According to GPIF's 2022 report, by using these tools, it has effectively controlled the overall risk of the investment portfolio, maintaining relatively stable performance even in the face of significant market fluctuations.
At the same time, Canada's CPPIB uses a wider range of derivatives, including swaps and forwards, for risk management. CPPIB's fiscal year 2024 report shows that by flexibly using these financial tools, CPPIB not only effectively managed investment risks but also created additional investment returns. For example, CPPIB used derivative strategies to achieve a 10.8% return in fixed income investments, far higher than the return rate of traditional fixed income investments.Therefore, expanding the range of investment tools for pension funds can amplify the returns from bond market investments when equity markets are weak, and can also serve to enrich their risk hedging instruments. Further liberalization of the use of more financial derivatives by long-term capital in China, such as options and futures, is advisable. Specifically, it could be considered to relax restrictions on the use of stock index futures and Treasury futures, allowing long-term capital to invest in structured products linked to stock indices. These products can provide downside protection while allowing investors to share in some of the upside gains, making them very suitable for the risk preferences of long-term capital. This would also allow long-term capital to use these tools for risk management within a certain proportion, thereby enhancing their ability to hedge risks.
These measures will help to improve the risk management capabilities of long-term capital, increase investment flexibility, and potentially increase overall returns. Taking insurance funds as an example, if they could use derivatives more flexibly for risk management, insurance companies might be more confident in increasing the proportion of equity investments, thereby hoping to improve long-term investment returns.
At present, most of the funds for social security, corporate annuities, etc., are entrusted to domestic public funds, insurance asset management, and other asset management institutions for management. Their investment styles tend to be similar, and over the years they have not achieved significant excess returns. Is this something that needs reflection? Why not entrust asset management to well-known domestic or foreign private investment institutions? After all, some of these asset management institutions have rich experience in managing pension funds, strong multi-asset allocation capabilities, and good use of hedging tools, and have achieved good performance and reputation both domestically and abroad.
Recommendation Two:
Further broaden the investment channels for long-term capital
The restrictions on overseas investment for long-term capital can be further relaxed, and the investment approach can adopt a "direct + entrusted" model to encourage medium to long-term capital to engage in deep cooperation with top global asset management companies. Compared with the overseas investment ratio of Japan's GPIF of about 50% (according to the GPIF's 2022 report, its overseas stock investment accounts for 25.06% of total assets, and overseas bonds account for 25.23%), and Canada's CPPIB's overseas investment ratio exceeding 80%, the current proportion of overseas market allocation for China's social security funds, insurance funds, and the second pillar of pension funds, corporate annuities, is extremely low. For example, the upper limit for overseas investment of social security funds is 20%, but the actual allocation is usually around 8-10%; although insurance funds can invest in foreign assets not exceeding 15% of total assets, most insurance companies' actual overseas investment ratio is less than 5%; corporate annuities' overseas investment through the QDII channel is even limited to 10% of net assets, and the actual allocation is often lower.
It is more noteworthy that the allocation channels for these medium to long-term capital in China are relatively "single" and mainly rely on the QDII channel. International leading pension institutions such as Japan's GPIF and Canada's CPPIB have adopted a more active global investment model in overseas investment channels. These two pension institutions combine direct investment with entrusted investment for overseas investment. For example, they not only set up offices in major financial centers, establish professional internal investment teams, and gradually increase the proportion of direct investment management of overseas markets internally, but also strengthen deep cooperation with top global asset management companies.
Therefore, for the overseas investment of China's medium to long-term capital, it is necessary to gradually increase the proportion of overseas investment, especially the proportion of overseas direct investment, while improving the risk management system for cross-border investment. In addition, cooperation with top global asset management companies should be strengthened. By establishing a "direct + entrusted" strategic partnership, leveraging the advantages of these institutions in specific markets or asset categories through entrusted investment methods, and learning advanced investment concepts and risk management technologies.
Recommendation Three:
Establish a "guarantee fund" for the security of long-term fundsThe national level should establish a stock market stabilization fund for A-shares as soon as possible. This is the most powerful support for the development and growth of patient capital and for encouraging long-term capital to enter the market. Currently, there are circulation issues in China's capital market. The inactivity of the secondary market leads to the downturn of the primary market, and the decline in risk preference causes a large amount of funds to flow into the bond market. This is also the main reason why long-term funds are reluctant to increase the proportion of equity asset allocation. Therefore, establishing a stabilization fund at the national level is conducive to expanding the scale of medium and long-term capital entering the market and greatly boosting the confidence of long-term investment in the market.
In addition, compared with the swap convenience policy, the "guarantee fund" designed for long-term capital may be more conducive to the long-term stability of the market. This is the most powerful support for the development and growth of patient capital and for encouraging long-term capital to enter the market. For example, the Ministry of Finance can take the lead in advancing a certain amount of "guarantee fund" to provide an insurance mechanism for institutions that invest in A-shares for a long time (such as insurance companies and social security funds).
In the future, regulations should stipulate that social security, insurance companies, enterprises, and occupational annuities should extract a certain proportion from investment returns each year as "guarantee fund" payments, making the scale of "guarantee fund" larger and larger in the future. This mechanism requires that only institutions that meet strict conditions can enjoy this policy, such as requiring long-term holding, dividends or reduction can only be made after many years, etc. If there is a loss after long-term (such as 5 years) investment, this guarantee fund tool will provide a certain degree of compensation.
The potential advantage of this proposal is that it can effectively lock the "market lower limit". By providing a certain guarantee for long-term investment, it enhances the confidence of institutions to invest against the trend, which is conducive to attracting more long-term capital to enter the market, improving market structure, and reducing short-term speculative behavior. Even if the funds may not actually need to be used, their existence itself can greatly boost market confidence. Since only long-term capital that meets strict conditions can enjoy this policy, it can also effectively avoid promoting short-term speculative behavior.
In general, by implementing these measures, we can expect to improve China's long-term capital investment capacity and make up for the disadvantage of lack of experience in the short term. In the long run, this will not only help to improve investment returns and diversify risks, but also promote the internationalization of China's capital market and enhance China's influence in the global financial system. However, in the implementation process, close cooperation between regulatory agencies, investment institutions, and policymakers is needed to steadily advance on the premise of ensuring the safety of funds. These measures will provide stronger financial support for China's pension system, effectively cope with the challenges brought by population aging, and also lay a solid foundation for China's long-term capital to participate in the global financial market.