As the policies continue to take effect and market expectations improve, there is a growing trend of foreign and institutional investments making their way into the Chinese stock marketOver the medium to long term, this influx of capital is poised to redefine the sources of new funds within the capital markets of China.

Recent months have seen a flurry of policies aimed at bolstering the stock market, with a significant focus on attracting investment from insurance funds and bank wealth management productsIn tandem, foreign investors are allocating more resources, influenced by expectations of monetary easing and fiscal policiesThis trend marks a shift towards medium to long-term funds contributing to the evolution of China's capital markets.

According to analyses by Guosen Securities, the anticipated flow of capital—primarily from foreign investments, insurance funds, and bank wealth management—into the stock market can be understood through three key dimensions.

Firstly, in terms of foreign investments, since late September, there has been a notable acceleration in the net inflows into Chinese equity funds

By now, these inflows have already surpassed the total for the entirety of 2021. Presently, the allocation of foreign capital to Chinese equity assets is relatively lowWith ongoing policy implementation and improving expectations, a continued influx of foreign capital into the stock market is highly likely.

Secondly, for insurance funds, the rising proportion of participating insurance products is likely to amplify their investment yield demands, leading them to increase equity asset allocationsVarious factors contribute to this, especially with the concurrent implementation of standards such as IFRS 9 and IFRS 17. This alignment facilitates better asset-liability matching for insurance companiesFor example, if the participating accounts utilize a Variable Fee Approach (VFA), the fluctuations in asset values can largely offset liabilities, easing concerns over mismatched funding

To enhance the attractiveness of their products, insurance firms are expected to boost allocations in equity assets, thereby increasing anticipated yields on these investmentsForecasts suggest that between 2024 and 2028, insurance companies may inject an additional 450 billion to 800 billion yuan into equity investments annually.

Lastly, concerning bank wealth management, the ongoing decline in non-standard asset supply has compelled banks to utilize smaller equity allocations to enhance yieldsThere is a significant uptick in the issuance rate of multi-asset products, with estimates indicating future annual stock market entries ranging from 10 billion to 300 billion yuan over the next five years.

The potential for ongoing foreign inflows remains substantialSince late September, foreign investments have surged into Chinese equities

By 2024, these net inflows are already reported to exceed the total amount for 2021. The policy-driven momentum and favorable expectations have led to a more aggressive positioning by foreign investors in Chinese equity assetsFor instance, the trading volume for Exchange-Traded Funds (ETFs) that focus on Chinese markets within the U.Shas seen dramatic increases, with week-over-week transaction rates soaring 6 to 7 times as of late September.

Notably, the trading volumes of northbound capital—representing foreign investments directed into Chinese markets—have significantly magnified, suggesting that net inflows could further intensifyBetween early August and late September, the average daily trading volume of northbound capital was around 95 billion yuanHowever, from September 23rd to 26th, this average surged to over 180 billion yuan per day

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Given the recent performance of A-shares, this increase might be a direct correlation to the robust inflow of northbound capital.

On several occasions throughout early February 2024, with significant rebounds in the stock market, daily trading volumes for northbound capital expanded rapidly, hitting close to 180 billion yuan, accompanied by cumulative net inflows of approximately 15 billion yuanGiven the overall positive sentiment towards the market, stronger policy involvement, and the quicker uptick in stock indices, it stands to reason that the net inflows of northbound capital will likely exceed early-year figures.

In a comparative evaluation of the foreign securities investment ratio relative to the total market capitalization of listed companies, it is observed that China currently lags behind the U.S., Japan, and India

As of 2023, these ratios are 15.7% for China, 23.7% for India, 49.4% for Japan, and 42.6% for the U.SThis indicates a significant discrepancy between the allocation strength of foreign capital and China's GDP and overall market capitalizationWith expectations continuing to improve, there exists ample room for foreign investment in the Chinese stock market.

Policy measures are working to leverage the advantages of long-term capital mobilized by insurance funds, actively guiding these funds into the marketKey measures include expanding pilot reforms for long-term insurance investments, allowing qualifying insurance firms to set up private equity funds and increasing allocations in capital markets.

Additionally, there are moves to optimize performance evaluation mechanisms for insurance companies, encouraging and guiding long-term equity investments

Furthermore, wealth management and trust companies are being incentivized to reinforce their abilities in equity investments, ultimately leading to the issuance of more long-term equity products.

In the first half of 2024, private equity funds established by firms such as Xinhua and China Life completed nearly 20 billion yuan in investments, largely concentrated in high-dividend, high-yield stocks within the secondary marketSubsequent policy developments may focus on delineating the treatment of assets and perhaps relax certain restrictions on insurance company investments in public funds, thereby encouraging allocations in ETFs and other structured assets to elevate the involvement of insurance capital in market activities.

Moreover, new policies propose the establishment of asset swaps among securities, funds, and insurance companies, allowing these entities to access liquidity from the central bank through asset pledging

This marks the first functioning structural monetary policy tool aimed at bolstering capital markets, commencing with an initial scale of 500 billion yuan, and plans are made for possible future expansions.

Investment mandates for insurance funds must simultaneously cater to solvency requirements, asset-liability matching, and yield expectationsThe regulatory framework sets different upper limits of equity investments according to the solvency ratios of insurance companiesIn practice, these companies' equity investments tend to fall below these imposed limits, suggesting that solvency does not significantly constrain their equity investment options.

Insurance firms must consider their asset allocation strategy, which directly involves the proportion of investments in bonds versus equities

Changes in liability structures and mismatches between asset and liability durations can greatly affect this asset allocation strategy, ultimately influencing the equity asset proportions.

According to data from the Insurance Asset Management Association, investments in life insurance account for about 87% of the insurance industry's overall investment assetsConsequently, the structure of assets allocated in the sector is heavily influenced by life insurance dynamicsFrom 2021 to 2023, the categories most increasing in investment asset proportions were interest rate bonds (up 6.3 percentage points), combination products (up 0.6 percentage points), and public funds (up 0.5 percentage points), while the share of equity assets remained relatively stable.

In recent years, the surge in sales of whole life insurance products has extended the duration of liabilities for insurance companies

Coupled with the continuous decline in interest rates, this pressure on meeting asset-liability matching requirements has prompted a rise in allocations towards interest rate bondsFurthermore, the implementation of IFRS 9 and IFRS 17 has also resulted in increased proportions of FVOCI (fair value through other comprehensive income) investments in both fixed income and equity categories.

The increased sales proportions of participating insurance products are likely to relieve some pressure on asset-liability matching, resulting in stronger demands for investment yields; thus, the allocation toward equity assets is expected to riseAmid reductions in preset interest rates for insurance products, this sales thrust toward participating insurance products is becoming prevalentThis shift is supported by the effective asset-liability matching achieved using the VFA method in compliance with IFRS standards, alleviating concerns regarding mismatches in funding sources.

Guosen Securities has forecasted the capital inflows of insurance funds into the stock market over the next five years, making predictions based on asset types and the annual increments associated with FVOCI equity assets under new regulations

The core assumptions driving these insights are concentrated on three fronts.

First, with the gradual increase in China's insurance asset management scale, growth rates for industry capital utilization are expected to stabilize over the years to come, with projections of 10%, 9%, 8.5%, 8%, and 8% from 2024 to 2028.

Second, the forecasted investment proportions in stocks and securities funds are based on historical investment behavior of insurance funds and the evolving allocation desires under the new regulationsAnticipated stock investment ratios are set at 7.5%, 7.8%, 8.4%, 9%, and 9% from 2024 to 2028, while fund investment proportions are expected to be 5%, 5.3%, 5.5%, 6%, and 6% respectively.

Third, the forecasted share of FVOCI equity assets out of the financial asset categories is predicted to be 35%, 38%, 43%, 48%, and 52% from 2024 to 2028.

Based on these projections, the anticipated annual growth in capital inflows from insurance funds may vary across the specified years, reaching 474.6 billion yuan, 541.5 billion yuan, 657.4 billion yuan, 827.9 billion yuan, and 466.5 billion yuan

Correspondingly, the expected inflow towards FVOCI equity assets (high-yield and high-dividend stocks) is quantified to be 199 billion yuan, 184.4 billion yuan, 316.8 billion yuan, 379.3 billion yuan, and 285.5 billion yuan during the same period.

The downturn in non-standard asset supply may compel further elevations in equity allocations for wealth management productsGiven that risk tolerance among wealth management clients tends to be low, banks face inherent limitations when it comes to allocating equity assetsTo illustrate, fluctuations of 10 to 20 percent in stock indices are commonplaceFor a wealth management product allocated 20% in stocks, this could result in a 2 to 4 percent drop, easily breaching the safety margins offered by bond investment returns, potentially inciting significant redemptions.

We can conceptualize this matter further through simulation analysis

In a scenario where banks predominantly hold credit bonds, using an AAA-rated credit bond index along with the CSI 300 index, net value fluctuations are analyzed under varying "fixed income + equity" allocation strategies.

This scrutiny reveals that if an investor's investment horizon is one year, upon reaching a 20% equity allocation, stock volatility is highly likely to incite losses in the respective wealth management products, potentially triggering significant redemption pressuresEven lowering the equity allocation to 10% could yield returns that barely exceed 2%, insufficient to match the performance of liquidity-backed investmentsMore critically, in an environment characterized by short bull markets and prolonged bear-like conditions, equities could underperform purely bond-based products, further undermining wealth management growth trajectories.

Consequently, improving equity allocation yields poses substantial timing challenges for bank wealth management sectors

In reality, these investments can materialize via two principal avenues: direct stock investments and allocations in public fundsThe collective investment in both equity and public fund assets within bank wealth management is currently approximately 1.94 trillion yuanIn recent years, the equity allocation proportions have remained around 3%, albeit seeing a downward trajectory, while public fund allocations have marked fluctuations maintaining a parallel 3% average, collectively composing only about 6% of total wealth management products.

It is noteworthy that the previously reported equitable investment within bank wealth products involves not only secondary market equity stakes but also preferred stocks and equity investmentsPublic fund investments cover bond funds and money market funds, indicating that the direct or indirect investments in the secondary market by bank wealth management products may be considerably less than the 1.94 trillion yuan figure suggests.

Based on statistics from Puyi Standard assessing the top ten investment positions within bank wealth management, the estimated scale of secondary market equities held by banks hovers around 300 billion yuan.

A key observation is that most of the equity assets held by banks are primarily comprised of preferred shares, particularly those from banking institutions

However, with the total scale of preferred stocks in circulation being approximately 800 billion yuan, the banks’ investment composition is unlikely to feature a staggering 85% in preferred stocksNotably, if preferred shares constitute half of these investment allocations, then assuming a 6:9 proportion between equity and secondary market stocks, estimations suggest bank wealth management would allocate around 255 billion yuan directly to equities in secondary markets from their 850 billion yuan stock investments.

When contemplating public funds, it is observed that these funds predominantly contain bond- and money-oriented solutions, with merely a 2% catchment in stock-oriented funds and a 4% share in mixed-type funds, assuming half of the mixed allocation targets equitiesThis results in a statistically projected 420 billion yuan allocated towards the stock market from the entirety of the estimated 1.09 trillion yuan in public fund investments.

Looking ahead, Guosen Securities anticipates that there will still be a substantial necessity for bank wealth management products to allocate equity, primarily driven by the declining supply of non-standardized assets

Hence, there lies a pressing need for banks to engage even marginal equity allocations to enhance overall yield metricsCore strategies may revolve around effectively timing major asset classes while possibly embracing the issuance of rights-oriented financial products, contingent on the intrinsic capabilities of wealth management asset allocationsAlternatively, extending the liability duration through the issuance of closed-end, long-term wealth management products could afford opportunities to optimize equity allocations under favorable conditions, which relies on accumulated clientele and market traction.

In summary, the anticipated trajectory of wealth management product scales, along with theoretical ranges spanning growth rates of 2% to 8% over the forthcoming five years, underscores a significant potential for the financial landscape in China, dictating how effectively these entities engage with equity allocations moving forward.