SCIO briefing on actively encouraging the flow of medium- and long-term funds into the capital market and promoting its high-quality development

Yicai:

The implementation plan proposes a comprehensive implementation of a long-cycle assessment of more than three years for state-owned commercial insurance companies. What are the considerations behind this? How will this requirement be implemented in the future? Thank you.

Liao Min:

Thank you for your question. Good morning everyone. Mr. Wu provided an overview on this issue just now, and I will briefly add a short explanation.

Implementing long-cycle performance assessments for state-owned commercial insurance companies is an important measure to encourage them to leverage the capital market for medium- and long-term investments. First, considering the nature of insurance funds, they have the characteristics of stable sources, large scale and long repayment cycles, making them typical long-term investment funds and important participants in the capital market. Insurance funds investing in the capital market is also a common practice and basic model internationally. Based on the fund operations of large state-owned commercial insurance companies in China, there remains room to further increase investment in the capital market. Second, the high-quality development of the capital market also requires the participation of medium- and long-term investment funds, including more insurance funds, to reduce short-term fluctuations and enhance long-term development resilience; and the high-quality development of the capital market will also positively impact the preservation and appreciation of medium- and long-term funds, including insurance funds.

To support the greater participation of insurance funds in the market, the MOF has consistently leveraged performance evaluation as a "guiding tool." In fact, in October 2023, the ministry issued a notice on the long-cycle assessment of state-owned commercial insurance companies, adopting a mix of long-term and short-term assessment methods. Under this approach, the performance indicator "return on net assets," a key metric in the performance evaluation framework for commercial insurance companies, is divided into two separate assessments: one based on the current year and the other on the previous three years, each weighted equally at 50%. The goal is to guide state-owned commercial insurance companies to optimize asset allocation and focus on long-term investment returns.

Next, we will follow the requirements of the implementation plan to further promote the entry of insurance funds into the market and revise the long-cycle assessment system for state-owned commercial insurance companies. The main considerations are:

First, we will further increase the weight of long-cycle assessment indicators related to operational efficiency. The weight of the long-cycle assessment indicator, "return on net assets," which I just mentioned, has been adjusted to no less than 60%. This will facilitate the entry of more medium- and long-term funds into the capital market, better aligning the assessment cycle with the investment horizon of long-term funds, and further leveraging the long-term capital nature of insurance funds.

Second, we will implement long-cycle assessment for the preservation and appreciation of state-owned capital. By combining long- and short-term assessment methods, we aim to encourage state-owned commercial insurance companies to scale up their medium- and long-term investments, thereby achieving steady growth in owners' equity and the preservation and appreciation of state-owned capital.

Third, we will promote the improvement of investment management capabilities in state-owned commercial insurance companies. We will encourage and guide state-owned commercial insurance companies to strengthen their investment management and enhance their long-term capital operation capabilities.

We believe that this series of measures will help guide and promote state-owned commercial insurance companies to pay more attention to stable operation, better carry out long-term and value investment, and more effectively play the roles of insurance funds as "market stabilizer" and "economic booster," injecting more impetus into the sustained and healthy development of China's capital market. Thank you.