Promoting medium-to-long-term capital inflows: Bridging capital market and the real economy

Editor's note: This article, written by Liu Qiang, a research fellow at the Academy of Financial Research, School of Economics of Zhejiang University of China, reflects the author's opinions and not necessarily the views of CGTN. It has been translated from Chinese and edited for brevity and clarity. 

The 2025 Government Work Report elevates "vigorously promoting medium-to-long-term capital inflows" to a strategic priority, to address not only short-term market fluctuations but, more fundamentally, signaling a profound transformation in the underlying logic of China's capital market. This strategy will not only optimize market functionality but also align with the economy's transition from scale-driven growth to quality-driven breakthroughs. By channeling medium-to-long-term capital into the markets, the symbiotic relationship between investment and financing can be strengthened, significantly enhancing the capital market's capacity to serve the real economy.

China's capital markets have long been plagued by irrational volatility, which is due to a retail investor-dominated structure and the disproportionate influence of short-term capital on pricing.

The phenomenon where enterprises are compelled to strategically realign their operations to cater to short-term valuation pressures has paradoxically exacerbated financing bottlenecks in high-growth sectors like technological innovation‌. By introducing medium-to-long-term capital, such as pension funds and insurance capital, the market equilibrium can be recalibrated, thereby reducing short-term fluctuations. Institutional reforms, including shifting mutual fund performance evaluations to long-term metrics, alongside tax incentives and expanded investment scope policies, will stimulate demand for long-term capital allocation, stabilize markets, and foster maturity. 

Such reforms will refine pricing mechanisms and resource allocation efficiency, laying a robust foundation for sustainable market development. The market stabilization mechanisms will undergo a fundamental evolution, shifting away from the policy-driven "rescue logic" of the past toward an endogenous stabilization system constructed by long-term capital.

The essence of medium-to-long-term capital lies in rebuilding value transmission between capital and industries, enabling deeper integration with the real economy. Traditional models, driven by short-term financial returns, often trap capital in speculative cycles. 

In contrast, long-term capital embeds itself in value creation processes, acting as a "co-creator" through strategic corporate engagement and support for core technology R&D. This approach not only accelerates innovation and industrial upgrading but also compels improvements in market infrastructure, such as information disclosure and corporate governance. The resulting virtuous cycle — where high-quality assets attract long-term capital, and long-term capital nurtures such assets — provides sustainable financial momentum for high-quality economic growth.

Promoting medium- to long-term capital inflows will embed capital market reform into China's modern governance framework, aligning it with national strategies. 

Long-term capital addresses market failures by funding early-stage and small enterprises, breaking technological bottlenecks, and advancing industrial transformation. Concurrently, ESG (environmental, social, and governance) investing channels capital toward low-carbon industries, driving green development. 

Moreover, the appreciation of pension funds and other public-oriented capital directly enhances social welfare, reinforcing the market's social responsibility. These systemic innovations dismantle regulatory barriers, create cross-market capital allocation pathways, and synchronize financial resource flows with national strategic objectives.

To further enhance market functionality and real-economy support, reforms must address structural challenges. Establishing a differentiated, multi-tiered market system is critical: Emphasizing the stabilizing role of blue-chip stocks on main boards while enhancing risk tolerance on the SSE STAR Market and Beijing Stock Exchange will accommodate diverse capital preferences. 

Accelerating derivatives market innovation — such as equity options and total return swaps — will improve risk management. Additionally, investor education and long-term investment advocacy will cultivate a culture of patient capital, ensuring sustained market stability.

Meanwhile, the reform must overcome the institutional inertia by overhauling incentive structures. The prevailing quarterly/annual performance evaluation cycles for institutional investors fundamentally conflict with the capital preservation and compounding requirements of medium- to long-term funds. Only by establishing a five-year or longer performance assessment framework, paired with policy instruments like tax-deferred incentives and lock-up period requirements, can we realign capital stewards' interests with strategic national development goals.

Promoting medium- to long-term capital inflows will not only harmonize investment and financing mechanisms but also elevate the capital market's role in powering economic transformation. This strategy will redefine the market's value framework, positioning it as a pivotal driver of China's growth model transition and the construction of a new development paradigm.