Text: Yan Xiang, Zhu Chengcheng
Key conclusions:
On April 30, the Political Bureau of the Central Committee of the Communist Party of China held a meeting, which once again emphasized that the development of venture capital and the expansion of patient capital are important measures for finance to help develop new quality productivity, and are of great significance for cultivating emerging industries and future industries. The meeting clearly stated that "it is necessary to actively develop venture capital and strengthen patient capital", which reflects the great importance of the Party Central Committee, which will also become an important starting point for doing a good job in the "five major articles" of finance.
The Politburo meeting once again proposed to strengthen the "patient capital", which will inject more source of fresh water into the high-quality development of the capital market in the future, and promote the better equity investment of medium and long-term funds such as pension and insurance funds, which is of great significance for the construction of a modern capital market with Chinese characteristics.
First, "patient capital" is conducive to the long-term and healthy development of the capital market. From the perspective of the development experience of domestic and foreign capital markets, the development and expansion of "patient capital" has many positive significance for the long-term healthy development of the capital market: First, the development and expansion of "patient capital" is conducive to expanding the proportion of institutional investors. Second, the development and expansion of "patient capital" will help stabilize market expectations and boost confidence. Third, the development and expansion of "patient capital" will help promote the scientific and technological innovation activities of enterprises. Fourth, the development and expansion of "patient capital" is conducive to cultivating the concept of rational investment and value investment in the market. Fifth, the development and expansion of "patient capital" will help improve the governance structure of listed companies.
Second, China's "patient capital" has developed rapidly in recent years. In the past decade since 2013, the mainland's "patient capital" has made great progress in its own development. At the same time, the scale of the mainland's medium and long-term capital investment equity market has also increased steadily. In the past year, the relevant policies and systems for "patient capital" to enter the market have been continuously improved, especially this year, measures to encourage "patient capital" to increase equity investment have been introduced and continuously implemented. Medium- and long-term funds such as "patient capital" have become an important source of incremental funds for the A-share market.
Third, China's capital market is expected to attract more "patient capital". There is no doubt that in recent years, the development of medium- and long-term funds such as "patient capital" in the mainland has made great progress, and the mainland capital market is expected to further attract more "patient capital" in the future. On the one hand, China's economic development has outstanding advantages, which is in line with the investment needs of "patient capital"; On the other hand, the mainland's "patient capital" has great potential for development, and there is still broad room for long-term improvement.
Risk Warning: First, geopolitical risks; Second, the macro economy is less than expected; Third, historical experience is for reference only; Fourth, large fluctuations in overseas markets.
The main body of the report
On April 30, the Political Bureau of the Central Committee of the Communist Party of China held a meeting, which once again emphasized that the development of venture capital and the expansion of patient capital are important measures for finance to help develop new quality productivity, and are of great significance for cultivating emerging industries and future industries. The meeting clearly stated that "it is necessary to actively develop venture capital and strengthen patient capital", which reflects the great importance of the Party Central Committee, which will also become an important starting point for doing a good job in the "five major articles" of finance.
Since the beginning of this year, the question of how to better guide and support medium and long-term funds to actively enter the market and form a mutually promoting and coordinated development between the two has aroused widespread concern in the whole society. The Politburo meeting once again proposed to strengthen "patient capital", which will inject more fresh water into the high-quality development of the capital market in the future, and promote medium and long-term funds such as pensions and insurance funds to better carry out equity investment, which is of great significance for the construction of a modern capital market with Chinese characteristics.
1 "Patient capital" contributes to the long-term healthy development of the capital market
From the perspective of the development experience of domestic and foreign capital markets, the development and expansion of "patient capital" has many positive significance for the long-term and healthy development of the capital market:
First, the development and expansion of "patient capital" is conducive to expanding the proportion of institutional investors. In recent years, the proportion of institutional investors in the mainland stock market has increased steadily, but there is still a lot of room for improvement compared with overseas developed markets. For example, in the U.S. stock market, individual investors account for only about 4% of the shares, while mainland individual investors account for 34.8%, and there is still a lot of room for improvement in the proportion of institutional investors. More importantly, individual investors account for 30% of the shares held in the mainland stock market, but they contribute more than 80% of the transactions, and the short-term capital activity in the market is relatively high. Therefore, the development and expansion of "patient capital" is conducive to further optimizing the investor structure of the mainland stock market.
Second, the development and expansion of "patient capital" will help stabilize market expectations and boost confidence. When the market is in a sharp decline or volatility, "patient capital" and other medium and long-term funds play the role of "stabilizer" and "ballast", "patient capital" and other medium and long-term funds into the market is conducive to increasing the incremental funds of the market, improving market liquidity, restoring market confidence, and alleviating investors' worries. National experience also shows that market stability will improve significantly as the proportion of long-term funds increases.
Third, the development and expansion of "patient capital" will help promote the scientific and technological innovation activities of enterprises. The development cycle of science and technology enterprises is matched with the long-term capital investment cycle, and medium and long-term funds such as "patient capital" can bring stable capital formation to science and technology enterprises, which is conducive to capital serving the real economy, and is also conducive to the stable business activities and focus on innovation activities of science and technology companies, and long-term funds can also share the returns brought by the rapid growth of science and technology enterprises, so as to achieve mutual promotion and coordinated development.
Fourth, the development and expansion of "patient capital" is conducive to cultivating the concept of rational investment and value investment in the market. Patient capital tends to be capital that adheres to long-term value creation and has a long-term outlook on capital returns. Patient capital tends to pay more attention to the concept of value investment, value enterprises with good performance and stable profits, and explore the intrinsic value of investment targets. Therefore, the development and expansion of "patient capital" is conducive to promoting value investment as a mainstream investment concept and reducing speculation that is keen on short-term speculation.
Fifth, the development and expansion of "patient capital" will help improve the governance structure of listed companies. "Patient capital" and other medium and long-term funds value the company's long-term stable development potential, so more attention is paid to the corporate governance structure and standardized development, especially in the context of deepening the reform of the capital market and promoting the registration system of stock issuance, "patient capital" will put forward higher requirements for the quality of listed companies, and promote the further improvement of the information disclosure system of listed companies, so as to meet the normative requirements of foreign capital allocation of resources, and will promote the standardized development of the market.
2 China's "patient capital" has developed rapidly in recent years
In the past decade since 2013, the mainland's "patient capital" has made great progress in its own development. Since 2013, the scale of long-term funds such as pensions, insurance companies, and social security funds in mainland China has increased year by year. At the beginning of 2013, the balance of insurance funds and the actual balance of enterprise annuity in mainland China were only 7.0 trillion yuan and 490.6 billion yuan respectively, and since then they have risen all the way, as of December 2023, the balance of insurance funds has reached 27.7 trillion yuan, and the balance of enterprise annuity has reached 3.1 trillion yuan. In 2013, the total assets of the mainland social security fund were 132.5 billion yuan, and as of the end of 2022, the total assets of the social security fund have also increased significantly to 2.9 trillion yuan. In 2013, the total size of the mainland public fund market was only 2.9 trillion yuan, and as of December 2023, the total scale of public funds has reached 27.3 trillion yuan. In 2013, the scale of non-guaranteed wealth management in mainland China was 6.5 trillion yuan, and it has expanded significantly since then, reaching 26.8 trillion yuan as of the fourth quarter of 2023.
At the same time, the scale of the mainland's medium and long-term capital investment equity market has also increased steadily. In 2013, the market value of insurance funds and public funds in the A-share market was 598.6 billion yuan and 1.3 trillion yuan respectively, and as of the 2023 annual report data, the market value of public funds in the A-share market reached 5.2 trillion yuan, and the total market value of insurance funds exceeded 1.5 trillion yuan. Since 2017, the provinces and cities that signed the entrusted investment contract of the basic pension insurance fund and the scale have also increased year by year, in 2017, only 7 provinces and cities signed the entrusted investment contract of the pension insurance fund, and the amount received was only 137 billion yuan, and as of 2023, all provinces have started to implement the entrusted investment of the basic pension insurance fund, and the entrusted contract size exceeds 1.64 trillion yuan.
In the past year, the relevant policies and systems for "patient capital" to enter the market have been continuously improved, especially this year, measures to encourage "patient capital" to increase equity investment have been introduced and continuously implemented. On September 10, the State Administration of Financial Supervision issued the Notice on Optimizing the Regulatory Standards for the Solvency of Insurance Companies, optimizing and reducing the equity factor and requiring insurance companies to strengthen the long-term assessment of investment returns. On October 30, the Ministry of Finance issued the Notice on Guiding Long-term and Steady Investment of Insurance Funds to Strengthen the Long-term Assessment of State-owned Commercial Insurance Companies to further strengthen the long-term assessment of state-owned commercial insurance companies and put forward relevant requirements for their investment management. On December 6, the Ministry of Finance issued the "National Social Security Fund Domestic Investment Management Measures (Draft for Comments)" to increase and adjust the investment scope of the National Social Security Fund, at present, the maximum investment ratio of national social security fund stocks and equity assets can reach 40% and 30% respectively, further improving the investment flexibility.
Medium- and long-term funds such as "patient capital" have become an important source of incremental funds for the A-share market. According to our calculations, in 2022 and 2023, the total scale of incremental funds brought by social security funds, insurance companies, and enterprise annuities to the A-share market has improved significantly compared with the previous year, and it is expected that the incremental funds brought by this year will still be an extremely important source of incremental funds for A-shares, and it is also an important part of the significant improvement in the incremental capital situation of the A-share market this year, injecting a strong centering agent into the market.
3 China's capital market is expected to attract more "patient capital"
There is no doubt that in recent years, the development of medium- and long-term funds such as "patient capital" in the mainland has made great progress, and the mainland capital market is expected to further attract more "patient capital" in the future. On the one hand, China's economic development has outstanding advantages, which is in line with the investment needs of "patient capital"; On the other hand, the mainland's "patient capital" has great potential for development, and there is still broad room for long-term improvement.
First, China's economic development has outstanding advantages, which is in line with the investment needs of "patient capital". The mainland has the institutional advantages of a socialist market economy, the demand advantage of a large market scale, the supply advantage of a complete industrial chain and supply chain system, and the endogenous driving force and resilience potential of China's economic development. The recently convened Central Economic Work Conference pointed out the direction for next year's economic work, proposing that it is necessary to persist in seeking progress while maintaining stability, promoting stability through progress, and establishing first and then breaking down, and emphasizing that more policies that are conducive to stabilizing expectations, growth, and employment will be of very positive and important significance to next year's economic work. At present, the overall profit cycle of A-share listed companies has bottomed out, and a series of policies to "activate the capital market and boost investor confidence" are constantly being introduced, and it is believed that its effect will continue to be released later. At the same time, the overall valuation of the market is at the bottom of history, and the direction of marginal easing of overseas liquidity has also arrived, and we believe that the space and possibility of the capital market to rise in 2024 are very worth looking forward to.
Second, in the long run, there is still a lot of room for improvement in the overall scale of medium- and long-term funds such as "patient capital" in the mainland. Taking pension as an example, according to OECD statistics, the proportion of pension assets in mainland China to GDP at the end of 2021 was 2.3%, which still has a lot of room for improvement compared with major international economies. From the perspective of the proportion of pension assets in GDP in OECD countries and regions, there are 5 pension assets accounting for more than 100% of GDP in 2021, namely the Netherlands, Iceland, Australia, Switzerland and the United Kingdom, accounting for 210%, 208%, 146%, 143% and 117% respectively, and the United States and Japan are 98% and 31% respectively.
Third, there is also great potential for improvement in the allocation ratio and pricing power of medium- and long-term funds such as "patient capital" in the mainland to the A-share market. From the perspective of the allocation of various long-term funds to A-shares, the current ratio of the market value of medium and long-term funds held by mainland funds to the total circulating market value also has great room for improvement compared with overseas mature markets. From the perspective of the proportion of their own equity asset allocation, the current social security fund total assets in the proportion of A-share allocation is 13.4%, insurance funds stock and fund investment ratio is only 12.0%, while the proportion of equity assets in the US pension asset allocation in overseas mature markets is 36.4%, the British pension asset allocation in the equity assets is 29.0%, so the mainland "patient capital" and other medium and long-term funds on the allocation of the A-share market also have great potential for improvement.
4 Risk Warning
First, geopolitical risks; Second, the macro economy is less than expected; Third, historical experience is for reference only; Fourth, large fluctuations in overseas markets.
This article is from the report "Patient Capital: Underlying Logic and Positive Meaning" released by Huafu Securities Research Institute on May 12, 2024.
Analyst:
燕翔， S0210523050003
朱成成， S0210523060003
New Book Recommendation|"In Search of the Road to Value: 1990~2023 Chinese Stock Market Review"
This book systematically reviews the market trend of A-shares from 1990~2023 since the establishment of the Chinese stock market, and pays more attention to the use of quantitative empirical evidence to explain market changes. The author tries to construct a "four-in-one" analytical framework for review, that is, macroeconomy, corporate earnings, interest rate level, and asset price comparison. Each year's market review is divided into three parts: the first part is a review of major events, which provides a narrative description of key events affecting the capital market; The second part of the economic situation analyzes the macroeconomic situation and the changes in the earnings and valuation of listed companies; The third part of the market characteristics analyzes and explains the structural characteristics of the stock market in the current year. The last two chapters of the book provide an overview of the investment framework, methodology and key issues of the A-share market.
In order to do a better job in the review research, the new version of "The Road to Pursuing Value" has made a lot of revisions, including: first, it has continued to write the review of the A market in the last three years from 2021 to 2023; The second is to reconstruct the annual strategic topics, and the methodological part with universal significance is summarized in the last two chapters of the book for a framework summary, so that readers can better understand the basic logic of A-share operation; the third is to increase a large number of special columns to think and discuss many special issues; Fourth, add inductive tables and data summaries to highlight the reference book attributes of this book; Fifth, the content of the original chapters has been supplemented and revised to a considerable extent. Overall, no less than 40% of the new version has been updated and revised.
At a time when the mainland is speeding up the construction of a financial power, the era of a comprehensive registration system has begun, and the capital market has attracted widespread attention from the whole society, we sincerely hope that the new edition of "The Road to Value" can help readers better understand the historical details of the past A-shares, so as to rationally and scientifically judge the short-term, medium- and long-term trends of the future market.
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