In the face of a volatile stock market, one question that has consistently emerged is how to stabilize the often erratic flows of capital and create an environment conducive to sustained economic growthFor China, this question has gained renewed urgency as the country seeks to address structural imbalances in its capital marketsAt the end of January, six central departments in China issued a landmark policy document aimed at guiding long-term capital into the stock marketThis move is part of a broader strategy to stabilize the market, reduce reliance on short-term speculative trading, and attract genuine long-term investors who can play a pivotal role in creating a more robust financial ecosystem.

The issue of insufficient strategic investors has been a persistent challenge for China’s stock market for decadesAs far back as the late 1990s, discussions about the need for strategic investors began to surface, yet these early ideas lacked the concrete definition and structure needed for practical implementation

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For many years, "strategic investors" were often loosely defined and included any investors who held stocks for longer periods, but this casual designation failed to bring about the desired stabilizing effect on the marketPublic funds, which were expected to fulfill the role of long-term, stabilizing investors, often found themselves trapped in short-term performance metrics, undermining their effectiveness.

The problem is rooted in several factors, most notably the scarcity of high-performing stocks that consistently offer upward trajectoriesIn the absence of a reliable pool of companies offering predictable long-term growth, even funds with genuine long-term intentions struggled to identify appropriate investment opportunitiesPublic funds, which traditionally take a conservative approach to investment, often faced pressure from investors demanding short-term returns or redemption

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This created a vicious cycle, where these funds' attempts to focus on long-term investments often fell short, as they were unable to weather the short-term fluctuations of the stock market.

As a result, China’s A-share market, which is the mainland’s stock exchange, has faced significant challengesThe lack of stable, long-term capital has created a market prone to volatility, where short-term traders dominate, exacerbating the effects of market bubbles and crashesThe shortage of genuine strategic investors means that the capital market fails to perform its ideal function of providing a steady foundation for the real economy to growThe absence of long-term capital also hampers the development of many industries that rely on stable investments for innovation and expansion.

However, in recent years, a shift has occurred in the dynamics of the domestic and international capital markets, creating an opportunity for long-term capital to finally find a foothold in China's stock market

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One of the most significant changes is the growing surplus of liquidityWith interest rates on savings and loans continually dropping, investors have sought higher-yielding investments, and blue-chip stocks with reliable dividend payouts have become increasingly attractiveThis trend aligns well with the objectives of long-term capital, which seeks to provide stable and sustained investment over extended periods. 

The role of insurance capital is central to this strategyInsurance funds are an ideal source of long-term capitalThese funds are designed to be invested over the long term to ensure that they can cover future liabilities, making them particularly well-suited for strategic investments in equitiesHistorically, insurance funds have played a dominant role in international stock markets, often acting as the backbone of national exchangesA prime example of this is Warren Buffett’s Berkshire Hathaway, whose investment strategies are heavily supported by the capital derived from its insurance operations

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This demonstrates that, when properly harnessed, insurance capital can be a key enabler of long-term market stability.

In China, the regulatory framework has begun to recognize the potential of insurance funds and other long-term capital sources to stabilize the stock marketNotably, a policy directive issued by the government now mandates that large insurance companies allocate at least one-third of their annual premium income to stock market investmentsWith annual premium income in China exceeding three trillion yuan, this policy could direct nearly one trillion yuan into the stock market each year, providing a substantial influx of long-term capitalThis shift is significant, as it aligns the interests of insurance companies with the broader goal of promoting market stability, and it provides an avenue for the stock market to become more resilient and less susceptible to short-term fluctuations.

Social security funds and enterprise annuities are also increasingly being seen as potential sources of long-term capital

These funds, which have long time horizons, are now positioned to play a more prominent role in the equity marketsPreviously seen as “lifeline money” for ordinary citizens, these funds were primarily focused on low-risk investments and were largely absent from the stock marketHowever, as the market ecology improves and the emergence of low-volatility, high-yield stocks offers a safe investment environment, these funds are more willing to engage in the stock marketThe emergence of a more stable market environment, coupled with regulatory support, has created an opportunity for these funds to enter the stock market without exposing themselves to undue risk.

The presence of long-term capital in the securities market is crucial not only for individual investors but also for the broader economyLong-term capital can help smooth out market volatility and reduce the influence of short-term speculative trading, providing a more stable environment for businesses to grow and develop

As a result, the stock market can function as a better barometer of the health of the real economy, with sustained investments reflecting the gradual growth of the broader economic landscape.

Furthermore, long-term capital can help bridge the gap between the capital market and the real economyThe infusion of stable investment into key sectors of the economy can drive growth and innovation, ensuring that companies have access to the funding they need to expandAs the real economy continues to recover, the stock market, bolstered by long-term capital, will reflect this progress, providing a stronger connection between policy objectives and economic realityIn turn, this alignment will help China’s policymakers achieve their broader economic development goals, ensuring that the stock market plays a positive role in the nation’s overall economic strategy.

The entry of long-term capital into China’s stock market is not just a policy shift—it is part of a broader structural transformation that will help the market mature and play a more productive role in the economy