China urges state-backed funds to buy more stocks amid market slump

China’s financial regulators on Thursday announced a number of measures urging big sovereign wealth funds and insurers to buy more shares as Beijing seeks to shore up a faltering stock market.

Major state-owned insurance companies are leading the way to increase the size and proportion of their investments in mainland-listed stocks and allocate 30% of the newly generated premiums about buying shares, China Securities Regulatory Commission Chairman Wu Qing said at a press conference on Thursday.

Wu said the pilot program, which will start in the first half of this year, will attract at least 100 billion yuan ($13.75 billion) from insurers to long-term equity investments. He expected the program to continue to expand and include at least “hundreds of billions of yuan” in share buybacks each year.

There are also mutual funds ordered to increase their shares He said that the shares listed on the mainland are at an annual rate of 10% in terms of market valuation for the next three years.

A consortium of six financial regulatorsIncluding the securities regulator, it first floated a plan on Wednesday to direct large funds, including pension funds, to buy more domestic stocks, according to a Chinese-translated statement from the regulators by CNBC.

“Entities such as insurers holding more Chinese stocks helps reduce volatility and create a more stable trading environment based on fundamentals,” said Eugene Hsiao, head of China equity strategy at Macquarie Capital.

He suggested the latest initiative would help “create more attractive long-term investment options” after the collapse in the property market took a toll on household wealth.

After the press conference, the benchmark CSI 300 index rose more than 1.8%, paring the index’s decline this year to about 2.7%, according to LSEG data.

When registering for CSI 300 15% annual profit last year, the index closed the year down about 12% from the year’s highs.

Beijing’s recent piecemeal stimulus measures have dashed investors’ hopes for a near-term turnaround in the ailing economy, sending funds into the safety of government bonds and pushing yields to record lows.

In October, the Central Bank of China began to operate exchange facility scheme to give to insurers and easier access for brokers to buy shares and relatively cheap central bank bonds, helping to finance share buybacks and buybacks of listed companies.

Dividend payments and share buybacks by Chinese companies hit record highs last year, Wu said as he encouraged listed companies to increase dividend payments ahead of the Chinese Lunar New Year later this month.

Wu pointed out that the CSI 300’s current dividend yield has reached 3%, “significantly higher than the 10-year Treasury yield.” The benchmark 10-year yield was at 1,671 on Thursday.

According to Lei Meng, China equity strategist at UBS, Thursday’s announcements are expected to lead to capital inflows into China’s “value stocks,” which are significantly undervalued given the huge potential for future growth.

About 12% of insurers’ assets are in stocks and other equity funds, equivalent to more than 4.4 trillion yuan, according to Xiao Yuanqin, deputy head of the National Financial Regulatory Administration.

By 2023, more than half of insurers’ assets were in bonds and bank deposits, according to the latest data from UBS. At the time, stocks alone accounted for 7% of insurers’ assets, the data showed.

“Efforts to stabilize the stock market primarily seek to reduce the negative wealth impact on household consumption,” said Edith Qian, equity research strategist at CGS International Hong Kong. He expects the policy to have a “fairly minimal” impact on fund flows in the A-share market, with a free-float market value of 78 trillion yuan.

— CNBC’s Evelyn Cheng contributed to this report.