China's Insurance Funds: A New Driver for the A-Share Market

China's financial regulators have unveiled a plan to encourage big state insurers and commercial insurance funds to increase their investments in the A-share market, aiming to boost the lagging stock market. This move comes as Chinese stocks kicked off 2025 with deep losses, fueled by worries about U.S. President Donald Trump imposing hefty tariffs on Chinese goods. The plan, jointly released by six financial regulators including the securities regulator, directs state-owned insurance companies to raise both the size and proportion of their investments in Chinese stocks listed on the mainland and equity funds.



The regulators will implement a long-term performance evaluation for state-owned insurance companies, with the annual return on equity weighted no more than 30% of the evaluation, and at least 60% for a longer three-to-five-year cycle. This shift in appraisal method reduces the impact of short-term appraisals on investments by insurance funds, enhancing their enthusiasm for equity investment. The plan will also guide mutual fund managers to steadily increase both the size and proportion of equity funds under their management.

China's insurance sector has already shown interest in investing in the stock market. In 2022, insurance companies invested 10 billion yuan ($1.6 billion) in mutual funds and local stock markets, focusing mainly on banks and technology shares. This move helped reverse earlier losses on China's benchmark stock index and led it to close 1.3 percent higher. The insurance sector's investment in the stock market is expected to grow further, driven by the government's encouragement and the potential for higher returns.

However, investing in the A-share market also comes with potential risks. The market is known for its volatility, and investments in the stock market can expose insurance companies to systemic risks. To mitigate these risks, insurance companies should employ advanced risk assessment models, such as the ARMA-GARCH model or GARCH-Copula-CoVaR model, to better understand and manage risks associated with stock market investments. Diversifying investments across different sectors and asset classes can also help mitigate risks.

In conclusion, China's insurance funds can play a significant role in driving the A-share market's growth and stability. By increasing their investments in the stock market, insurance companies can inject liquidity, stabilize market volatility, promote a long-term investment culture, and enhance market confidence. However, it is crucial for insurance companies to manage risks effectively and adopt a long-term investment horizon to maximize the benefits of this strategy.

As an investor, it is essential to stay informed about the latest developments in the market and understand the potential risks and benefits associated with different investment options. By doing so, you can make well-informed decisions and capitalize on the opportunities presented by the growing interest of insurance funds in the A-share market.