Financial Measures Boost Market Stability

On September 24th, the State Council Information Office held a press conference to introduce the situation concerning financial support for high-quality economic development. Pan Gongsheng, Governor of the People's Bank of China, Li Yunze, Director of the Financial Regulatory General Bureau, and Wu Qing, Chairman of the China Securities Regulatory Commission, responded to hot issues of public concern from multiple perspectives, including increasing the intensity of monetary policy regulation, creating a safe and stable financial environment, and improving the coordinated functions of investment and financing in the capital market.

Enhancing the Inherent Stability of the Capital Market

The stock market is a barometer of the macroeconomy. Recently, influenced by multiple factors, the A-share market has been relatively weak, posing challenges to stabilizing market expectations, boosting the confidence of micro-entities, and achieving the annual economic and social development goals.

To support the stable development of the stock market and boost investor confidence, the People's Bank of China has created new structural monetary policy tools. Pan Gongsheng stated that, based on international experience and the People's Bank of China's own past practices, in consultation with the China Securities Regulatory Commission and the Financial Regulatory General Bureau, two structural monetary policy tools were created: one is the creation of a swap facility for securities, funds, and insurance companies; the other is the creation of a special re-lending facility for stock buybacks and increases.

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The swap facility supports eligible securities, funds, and insurance companies to use assets such as bonds, stock ETFs, and constituents of the CSI 300 as collateral to exchange for high-liquidity assets such as national treasury bonds and central bank bills from the central bank. "Many institutions have assets on hand, but under current circumstances, their liquidity is relatively poor. By swapping with the central bank, they can obtain higher quality and more liquid assets, which will greatly enhance the capital acquisition and stock increase capabilities of the relevant institutions," Pan Gongsheng said. The initial operation scale of the swap facility is planned to be 500 billion yuan, and the scale may be expanded in the future depending on the situation.

Tian Xuan, Dean of the National Institute of Financial Research at Tsinghua University, believes that the initial operation scale of 500 billion yuan for the swap facility demonstrates the People's Bank of China's determination and courage to support market liquidity, which will boost market confidence, promote market transactions, and enhance market liquidity. The creation of a special re-lending facility is an innovative business practice by banks to support the development of the capital market, which can promote stock increases and buybacks, enhance capital market liquidity, and assist in the development of listed companies.

Wen Bin, Chief Economist of China Minsheng Bank, stated that the two new tools created by the central bank will more directly guide funds to the stock market, providing convenient tools for securities, funds, and insurance companies to adjust and increase their stock positions, and providing supportive tools for long-term funds to enter the stock market. It is expected to help boost investor confidence, increase market risk appetite, and maintain a more stable and high-quality development of the capital market.

In the past period, the Central Huijin Company has increased its holdings of ETFs, reflecting the national investment institution's high recognition of the investment value of the A-share market, and has also played an important role in stabilizing the market and boosting confidence.

"Many domestic and foreign investment institutions and research institutions also believe that the valuation of the A-share market is at a historical low, and the investment value is highlighted," Wu Qing said. The China Securities Regulatory Commission will work with relevant parties to further support the Central Huijin Company to increase its holdings and expand its investment scope, promote various medium and long-term funds, including the Central Huijin Company, to invest in the stock market, actively support various funds, including insurance funds, to increase their market entry, and provide a better policy environment. Further enhance strategic reserve strength and jointly promote the stable and healthy development of the capital market.

The Third Plenary Session of the 20th Central Committee of the Communist Party made strategic deployments for further comprehensively deepening the reform of the capital market. Wu Qing said that the China Securities Regulatory Commission will adhere to strengthening foundations and strict supervision, and insist on promoting development and stability through reform, continuously improving the coordinated functions of investment and financing in the capital market to better serve Chinese-style modernization. Focus on "three highlights": First, highlight the enhancement of the inherent stability of the capital market. Establish a clear orientation of rewarding investors, improve the quality of listed companies and investment value. Accelerate investment-side reforms and promote the construction of a "long money for long-term investment" policy system. Further improve the policy toolkit and maintain the bottom line of risks. Second, highlight serving the recovery and improvement of the real economy and high-quality economic development. Focus on serving key areas such as new quality productive forces, make good use of various capital market tools such as stocks, bonds, and futures, and take multiple measures to invigorate the mergers and acquisitions market. At the same time, efforts will be made to work with all parties to facilitate the circulation of each link in the "raising, investing, managing, and exiting" of private equity venture capital funds. Third, highlight protecting the legal rights and interests of small and medium investors. Resolutely crack down on illegal and irregular behaviors such as financial fraud and market manipulation, and at the same time, strive to implement more exemplary cases in representative litigation and advance compensation.Creating a Favorable Monetary and Financial Environment

This year, the People's Bank of China (PBOC) has adhered to the fundamental purpose of serving the real economy, maintaining a supportive monetary policy stance and direction. In February, May, and July, significant monetary policy adjustments were made three times, with continuous visible results. By the end of August, the social financing scale grew by 8.1% year-on-year, and the RMB loan growth was 8.5% year-on-year, which is about 4 percentage points higher than the nominal GDP growth rate, and the financing costs are also at a historical low.

To further support the stable growth of the economy, Pan Gongsheng announced three new policies at a press conference held by the State Council Information Office: First, to lower the reserve requirement ratio and policy interest rates. Second, to reduce the interest rates on existing housing loans and unify the minimum down payment ratio for housing loans. Third, to create new monetary policy tools to support the stable development of the stock market.

The introduction of a package of incremental policies for loose money, stable real estate, and stable economy has exceeded market expectations and will play an important role in boosting market confidence, stimulating the vitality of entities, and enhancing the sustainability of financial support for the real economy. It has also sent a positive signal of strengthening policy coordination and focusing on promoting the realization of the annual economic growth target.

Specifically, the reserve requirement ratio will be reduced by 0.5 percentage points in the near future, providing about 1 trillion yuan of long-term liquidity to the financial market. The central bank's policy interest rate, namely the 7-day reverse repo operation interest rate, will be reduced by 0.2 percentage points, while guiding the loan market报价 interest rate and deposit interest rate to move down synchronously, maintaining the stability of the net interest margin of commercial banks.

Wang Qing, Chief Macro Analyst at Orient Gold Honesty, believes that the central bank's announcement of interest rate cuts and reserve requirement ratio reductions will play a positive role in stimulating the total demand of the macroeconomy. On the one hand, the reduction of financing costs will directly stimulate consumption and investment demand, effectively playing a counter-cyclical regulatory role and promoting the improvement of economic growth momentum. On the other hand, after the central bank plays a policy "combination punch", it will effectively boost market confidence and improve social expectations.

In terms of real estate support policies, commercial banks will be guided to reduce the interest rates on existing housing loans to near the interest rates of newly issued loans, with an expected average reduction of about 0.5 percentage points; unify the minimum down payment ratio for the first and second housing loans, and reduce the national level minimum down payment ratio for the second housing loan from the current 25% to 15%; etc.

"Real estate is a pillar industry in our country. Promoting a virtuous cycle between finance and real estate is not only needed for the healthy and stable development of the real estate market but also for preventing and resolving financial risks," said Dong Ximiao, Chief Researcher at China United. Banks reducing the interest rates on existing housing loans will further reduce the pressure on borrowers' mortgage interest payments, which is conducive to stabilizing residents' consumption expectations, reducing the phenomenon of early mortgage repayments, and at the same time, it can also compress the space for illegal replacement of existing housing loans, protect the legitimate rights and interests of financial consumers, and maintain the stable and healthy development of the real estate market.

Pan Gongsheng said that during the design and adjustment process of monetary policy tools, there are several important considerations: first, to support the stable growth of China's economy; second, to promote a moderate rise in prices; third, to balance support for the growth of the real economy and the health of the banking industry; fourth, to maintain the basic stability of the RMB exchange rate at a reasonable and balanced level; and fifth, to support fiscal policy to play a better role.

Promoting medium and long-term funds into the marketLong-term capital investment operations are highly specialized and stable, which is of great significance in overcoming short-term market fluctuations and playing the role of a "stabilizer" in the capital market. In recent years, the China Securities Regulatory Commission (CSRC) has vigorously promoted the development of equity public funds and worked with relevant parties to promote long-term capital into the market. As of the end of August this year, the total holding of A-shares' circulating market value by professional institutional investors such as equity public funds, insurance funds, and various pension funds has approached 15 trillion yuan, more than doubling from the beginning of 2019, and the proportion of A-shares' circulating market value has increased from 17% to 22.2%.

However, at the same time, the current capital market still has prominent issues such as insufficient total amount of long-term capital, suboptimal structure, and insufficient leading role. To further eliminate the pain points and blockages for long-term capital entering the market, Wu Qing revealed at the meeting that the CSRC and other relevant departments will soon issue the "Guiding Opinions on Promoting Long-Term Capital into the Market." "The 'Opinions' include a series of arrangements to support long-term capital entering the market, and we believe the institutional environment will continue to be optimized. The 'Opinions' are generally aimed at the goal of 'more long-term money, longer long-term money, and better returns,' and further promote the entry of long-term capital into the market."

Insurance funds are large in scale, long in term, and stable in source, and naturally have the attributes of patient capital, making them important value investors in supporting the healthy and sustainable development of the capital market. Previously, the State Council issued the "Several Opinions on Strengthening Regulation, Preventing Risks, and Promoting High-Quality Development of the Insurance Industry," proposing to leverage the long-term investment advantages of insurance funds.

The Financial Regulatory Administration has always attached great importance to the capital market and actively guided banks, insurance companies, and asset management institutions to maintain the stability of the capital market. "Previously, with the approval of the State Council, we promoted China Life and New China Life to carry out pilot projects, jointly initiated the establishment of private securities investment funds, and raised insurance funds to invest in the capital market. The fund's registered capital is 50 billion yuan, and it has officially started investment operations, and is currently progressing smoothly," said Li Yunze.

"Next, we will continue to support the sustained and stable development of the capital market," Li Yunze said. First, expand the reform pilot of long-term investment of insurance funds, support other eligible insurance institutions to establish private securities investment funds, and further increase the investment in the capital market. Second, supervise and guide insurance companies to optimize the assessment mechanism, encourage and guide insurance funds to carry out long-term equity investments. Third, encourage wealth management companies and trust companies to strengthen the construction of equity investment capabilities, issue more long-term equity products, actively participate in the capital market, and cultivate and expand patient capital through multiple channels.

Venture capital has become an important force in developing new quality productive forces, building a modern industrial system, constructing a new development pattern, and promoting high-quality economic and social development. In June this year, the General Office of the State Council issued the "Several Policy Measures to Promote High-Quality Development of Venture Capital," proposing to expand the scope of direct equity investment pilot of financial asset investment companies.

At present, in the total social financing in China, indirect financing still occupies the main position, which means that a development path of technology finance, especially sci-tech investment, with Chinese characteristics needs to be taken. Among them, it is necessary to guide banks to increase support for scientific and technological innovation and venture capital investment.

"Previously, financial asset investment companies under large commercial banks have carried out equity investment pilots in Shanghai, explored paths, accumulated experience, and have the conditions to expand the pilot," Li Yunze said. To effectively play the leading role of the pilot and encourage the development of venture capital, three measures are proposed to promote: first, expand the scope of pilot cities; second, relax restrictions, appropriately relax the restrictions on the amount and proportion of equity investment, increase the proportion of on-balance-sheet investment from the original 4% to 10%, and increase the proportion of investment in a single private fund from the original 20% to 30%; third, optimize the assessment, guide relevant institutions to implement the requirements of due diligence exemption, and establish a long-cycle, differentiated performance assessment.