In recent times, there has been a noticeable clarity in the mechanisms and policies that govern the entry of medium- to long-term capital into the market, specifically funds from insurance, social security, and basic pension schemes. This increasing transparency encourages the development of a capital market ecosystem that fosters long-term investments, and is poised to boost market confidence. The inflow of more "active" funds is expected to drive higher quality growth in the capital markets, further solidifying this upward trend.

The topic of medium- to long-term capital entering the market at a quicker pace has been one of the hot discussions in recent market conversations. This interest has only grown following a recent announcement from key officials in the Chinese financial landscape.

In September 2024, officials from the People's Bank of China, including Party Committee member Zou Lan and Deputy Director of the National Financial Regulatory Administration Xiao Yuanqi, provided insights on their efforts to accelerate the inflow of medium- to long-term funds. This high-profile initiative is aimed at guiding commercial insurance funds, national social security funds, basic pension funds, corporate annuities, and public funds to significantly increase their contributions to the market.

It has been argued by various entities that the influx of medium- to long-term capital could enhance the composition of investors in the market. By promoting value investing and long-term investment philosophies, this move could significantly decrease market volatility and speculative trading. This, in turn, boosts investor confidence, thereby improving the effectiveness of market resource allocation. For instance, GF Securities has asserted that the positive adjustments in the capital market's ecological structure will create a solid foundation for the sustainable development of China's A-shares.

Yet, there's a pressing question regarding the scale of the capital boost expected from these policies. Currently, public funds remain the dominant force in the market's institutional capital. In contrast, other medium- to long-term funds have relatively modest sizes, indicating that more capital increases are necessary for a significant market impact.

Based on calculations from Founder Securities, as of the third quarter of 2024, the investment balance of insurance funds in stocks and mutual funds amounts to approximately 4.11 trillion yuan. The five-year compound annual growth rate stands at 11.7%, with this investment representing 12.8% of total fund usage, remaining relatively stable over the last three years. Looking ahead, it is anticipated that with supportive policies, particularly improvements in solvency systems and long-term assessment mechanisms, the proportion of insurance funds invested in equities is slated for a rise, likely attracting more incremental and patient capital towards A-shares.

The third-quarter report outlined that funds and fund management companies (including public funds and special account funds) hold a total of 1.82 trillion yuan in A-share market value, reflecting a decline of 1.18 trillion yuan since the first half of the year. In contrast, insurance companies saw an increase in their holdings to 1.56 trillion yuan, which is a rise of 353.4 billion yuan, while social security funds recorded a growth to 459.9 billion yuan with an increase of 477.5 billion yuan. Corporate annuities remained stable, holding a market value of 8.6 billion yuan. By the end of the third quarter, the total market capitalization of A-shares stood at 78.4 trillion yuan, suggesting ample potential for increasing the value of these medium- to long-term funds in the market.

Huafu Securities has indicated that, in tandem with the current size of public funds and statistical measures from the WIND platform, public fund investments in equities are likely to rise by approximately 180 billion yuan, 200 billion yuan, and 220 billion yuan or more over the next three years (2025-2027). Additionally, the new premium inflow to insurance firms is projected to exceed 140 billion yuan in 2024 compared to 2023, further supporting equity investment growth.

Another sector analyst, Dongwu Securities, has pointed out that the vast volume of medium- to long-term funds has the potential to continuously infuse vitality into the capital market. The total funds in life and property insurance by the end of the third quarter of 2024 are estimated to be around 31.1 trillion yuan, with stocks, mutual funds, and long-term equity investments making up 2.3 trillion yuan, 1.8 trillion yuan, and 2.4 trillion yuan respectively.

In a optimistic scenario presented by Huabao Securities, it is possible that medium- to long-term capital inflows could generate an annual increase of over one trillion yuan for A-shares, with public fund inflows expected to reach around 586 billion yuan in 2025, alongside targeted insurance fund trials amounting to no less than 100 billion yuan.

The advantages of this trend are clear and multifaceted. Given the current macroeconomic policies and the structural features of economic recovery in China, it is believed that the recent influx of medium- to long-term capital into the market may benefit three primary areas: (1) enhancing new productive forces aligned with national strategic needs, (2) supporting enterprises in updating equipment and undertaking research and development, and (3) favoring assets with high safety margins that coincide with pension fund characteristics.

Furthermore, there is a recommendation from Founder Securities to focus on investment opportunities within the non-bank sector, especially given the notable recalibration in valuations, which presents attractive prospects.

With the anticipation that macro policies will gradually strengthen and market conditions improve, insurance firms are expected to experience alleviated investment pressures. This expectation is likely to propel the revival of equity investments, driving valuations higher, especially amid declining deposit rates which could enhance net premium values (NBVM) and ultimately fortify ongoing profitability trends in the insurance sector.

Looking towards the future, it seems plausible that funds will gravitate towards stocks that exhibit high dividend returns and substantial market capitalizations. Moreover, insurance funds are more likely to increase stakes in undervalued, high dividend, and low-volatility equity assets, which aligns with the strategic interests of listed companies that tend to engage in buybacks whenever their valuations and dividend yields become particularly appealing. This suggests that this new wave of capital investment is likely to focus primarily on more stable and undervalued companies, particularly in sectors like banking that exhibit resilience against cyclical fluctuations.

In summary, the various strategic and economic adjustments, alongside the potential for substantial capital inflows into China's A-share market, sculpt a conducive environment for long-term investments that promise sustainable growth ahead.