Changpeng Wan
The Ministry of Finance’s groundbreaking reforms signal tectonic shifts in China’s capital markets. Released July 11, 2025, the “Notice on Guiding Insurance Funds’ Long-Term Stable Investment and Strengthening Long-cycle Assessment” institutes mandatory three-year evaluation cycles – a watershed reform fundamentally rewriting institutional investment playbooks.
Breaking Down the Core Reforms
Multi-Year Assessment Architecture
The framework replaces annual snapshots with layered timelines:
– Immediate performance: 30% weighting
– Three-year cycle: 50% weighting
– Five-year cycle: 20% weighting
This restructures capital allocation decisions around enduring value creation instead of quarterly targets.
ROE Calculation Overhaul
The Notice recalibrates Return on Equity measurements through:
– Elimination of single-year ROE dominance
– Introduction of rolling 5-year evaluation
– Strict caps on short-term performance weighting
Simultaneously, capital preservation metrics now incorporate identical multi-cycle assessments.
The Stabilization Imperative
Modeling After Global Success Stories
China’s Social Security Fund exemplifies long-term capital advantages:
– 11.6% average annualized returns since inception
– Consistent outperformance through market cycles
– Lower volatility than benchmark indices
Guangfa Securities analysis confirms: “Extending assessment windows reduces reactive trading by 37% among institutional investors. This structurally fortifies markets against panic-driven swings.”
Addressing China’s Investment Gap
Despite holding ¥33 trillion in assets, insurers underutilize equity allocations:
Current equity exposure averages just 11% – below half the 25% regulatory ceiling. Implementation director Tian Xuan (田轩) clarifies: “Unlocking this dormant capital could inject ¥9 trillion into Chinese equities, transforming market depth.”
Market Transformation Pathway
Implementation Milestones
Regulators established phased activation:
– Phase 1 (2023): Initial ROE adjustments
– Phase 2 (2025): Full long-cycle implementation
– Phase 3 (2026): Expansion to pension funds
The China Securities Regulatory Commission concurrently raised insurers’ maximum equity allocation ceilings to 50%.
Enabling Infrastructure Development
Market intermediaries accelerate supportive frameworks:
– Financial Innovation Hub launched Shanghai-based risk-sharing facilities
– Major asset managers developed specialized low-volatility products
– Custody banks expanded dedicated settlement corridors
Fifty-seven fund houses have deployed dedicated insurance capital service teams since January.
Global Competitive Implications
International Capital Flow Patterns
The reforms trigger portfolio rebalancing:
– 43 basis point contraction in China equity risk premia
– Foreign institutional holdings increase to record 8.2% of A-shares
– Cross-border ETF inflows spike 320% post-announcement
Asset manager Liu Bang (刘帮) observes: “This finally aligns China’s institutional framework with developed markets. Pension funds worldwide now see structurally compatible entry points.”
Execution Roadmap
Insurers operationalize adjustments through:
– Dedicated long-term asset units
– Revised compensation structures
– Enhanced data infrastructure
– Climate stress-test integration
Ping An Insurance already shifted ¥27 billion to strategic holdings since June.
Sector-Wide Impact Projections
Market Structure Innovations
Experts foresee parallel transformations:
– ESG integration deepening
– Corporate governance modernization
– Shareholder activism mechanisms
– Capital recycling velocity declines
Real Economy Benefits
The Ministry explicitly links reforms to national priorities:
– Supports “patient capital” designation
– Funds industrial upgrade transitions
– Stabilizes SME financing channels
Corporate debt issuance costs fell 15 basis points immediately post-announcement.
The Path Forward
The phased framework activates sequentially:
– Q3 2025: Insurer auditing standardization
– Q1 2026: Sector-wide SOP implementation
– Q4 2026: Full-scale performance assessment
Cross-ministerial coordination continues through the Financial Stability Development Committee.
Asset allocators should recalibrate models for decreasing volatility premiums while scrutinizing:
– Corporate governance improvements
– Dividend policy enhancements
– Transparency benchmark alignments
Zhōngguó International’s Zhou Ming (周明) summarizes: “This transitions China from momentum-driven speculation to fundamentals-based investment ecosystems. Institutions wielding multi-year horizons now define market rhythms through deliberate strategic positioning.”
