Harmonizing Capital Market Investments and Financing

In recent discussions, the Central Economic Work Conference has outlined a plan to enhance the capital market reform in China, aiming to deepen the integration of investment and financingExperts believe this decisive move is essential in breaking through existing barriers that hinder long-term investments in the marketBy emphasizing the need for a more inclusive and adaptable regulatory framework, the conference provides a clear direction for advancing the capital market reforms which are crucial for fostering a healthy economic environment.

China’s capital market has witnessed substantial reform in recent years, especially with the ongoing shift towards a registration-based system for stock issuanceThe multi-tiered development of the capital markets has significantly picked up pace, particularly on the financing front, showing promising resultsHowever, the foundations for a stable and healthy capital market are still being solidified, as many investors struggle to feel the tangible benefits of their investments

This imbalance between investment and financing functions needs to be addressed to enable seamless integration – a critical component emphasized in the conference discussions.

The relationship between investment and financing is symbiotic; they must evolve together harmoniouslyA focus on improving the capital market's dual functions is now gaining prominence, indicating a shift towards a more structured and coordinated approachAs noted by Yan Xiang, Chief Economist at Huafu Securities, the conference's emphasis on deepening comprehensive reforms is an affirmation of the use of reformative mechanisms to tackle deep-rooted contradictions plaguing the capital market, thus fostering an environment conducive to high-quality development.

Through integrating investment and financing efficiencies, the reforms aim not only to instill confidence among investors but also to attract larger volumes of funds into the market

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Additionally, these changes are expected to enhance capital market pricing mechanisms, thereby providing better service to the real economyNotably, they also aim to effectively mitigate financial risks and ensure stable macroeconomic development.

Zhang Jun, Chief Economist and Director of the Research Institute at China Galaxy Securities, highlights the focus on long-term development as a core goal of the reformsContinual advancements in the capital market, improved investor demographics, and refined direct financing mechanisms are all targeted at increasing the market's overall efficiency and appealInnovative firms, in particular, stand to benefit from more accessible financing routes introduced via this reform approach while attracting long-term capital, which boosts market stability and resource allocation efficiency, thus aiding economic transformation.

Long-term capital, often referred to as the market's "ballast," holds substantial importance in addressing short-term market fluctuations

In recent years, multiple government initiatives have been launched to facilitate smoother entry for such capital into the marketThese measures reflect a progressive environment suitable for long-term and stable investments.

Set to be implemented in April 2024 with the new "National Nine Measures," the initiatives propose the cultivation of a market ecosystem conducive to long-term investmentThey introduce a foundational framework tailored to long-term investors while establishing a supportive policy system for such investmentsIn September, a stronger emphasis was placed on optimizing the capital market environment, promoting equity mutual funds, and refining supporting policies for various long-term capital types entering the market.

Taking equity mutual funds as a primary example, by August 2024, these funds, alongside insurance capital and various pension schemes, had amassed a staggering A-share liquidity market cap of nearly 15 trillion RMB—a significant increase from just under half that amount in January 2019. This rise demonstrates a growing trend where long-term funds are becoming a more prominent presence in the Chinese market.

Analyzing the ongoing reforms, Li Qiuxu, Chief Analyst of the Domestic Strategy Department at CICC, points to the introduction of the new "National Nine Measures" and the gradual establishment of a "1+N" policy framework

The aim is to introduce long-term funds to enhance pricing efficiency, protect investors’ rights, and encourage mergers and acquisitions—essential components for a dynamic second-tier market supporting incremental innovation.

As the importance of refining the structure of investors becomes increasingly evident, Zhang emphasizes the future attractiveness of long-term investments like insurance and pensionsSuch capital influx is expected to not only bolster market resilience but also alleviate short-term volatility, guiding the capital market toward healthier and more rational growth while injecting robust momentum for long-term stability.

Li Qiuxu suggests that more initiatives are likely to unfold aimed at attracting long-term capital into the market, including efforts to optimize the investment environment for social security funds and pensions, thus encouraging an increased allocation to equity assets

Additionally, further diversification through new index funds and derivative products will provide investors a wider array of choices, which should help stabilize market expectations.

The Central Economic Work Conference also raised concerns regarding the pivotal nature of market stability, given its direct correlation to investor wealth and sentimentAffirming the need to stabilize both the property and equity markets, experts noted that such stabilization reflects the government's concern for immediate economic stability whilst showing a resolve to pursue structural reforms that underpin sustainable and high-quality long-term growth.

Since September 2024, a concerted array of incremental policies has been put forth to reinforce macroeconomic counter-cyclical adjustments and bolster the capital marketThe People's Bank of China has pioneered two structural monetary policy tools aimed at sustaining stable development within the capital markets.

Recent data indicates the successful deployment of the initial batch of 50 billion RMB in swap facilities

More than 200 listed firms have since leveraged repurchase and increase loans, culminating in total repurchase financing of approximately 46 billion RMB before mid-December 2024.

Li Qiuxu expounds on how structural monetary policy tools aim to uplift stock market performanceThe synergy between securities, funds, and exchanges facilitates ongoing financial inflow—especially noteworthy during periods of muted market sentimentEnhanced repurchase and increase loans drive firms to effectively manage market capitalization, thus reinforcing investor confidence in their growth trajectory.

The stability of the stock market profoundly impacts household wealth and investor assurance, with implications for the movement and allocation of mid- to long-term capitalZhang points out that optimizing capital liquidity, improving policy support, and striving to enhance market mechanisms can significantly augment the resilience and vitality of the capital markets, enabling them to serve the real economy and support innovative development effectively.

On December 14, 2024, the agenda to align with the Central Economic Work Conference was reiterated, addressing the implementation of directives from the nationwide financial system meetings

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