Central Bank Launches New Policy Tool to Support Capital Market: What's the Signal?

On September 24th, Pan Gongsheng, the Governor of the People's Bank of China (PBOC), announced at a press conference held by the State Council Information Office that the PBOC, in consultation with the China Securities Regulatory Commission (CSRC) and the Financial Regulatory General Administration, will create two structural monetary policy tools to support the stable development of the capital market. This marks the first time the PBOC has innovated structural monetary policy tools to support the capital market.

The first tool is the Securities, Fund, and Insurance Company Swap Facility. This facility supports eligible securities, fund, and insurance companies, with specific institutions to be determined by the CSRC and the Financial Regulatory General Administration according to certain rules. The aforementioned institutions can use assets such as bonds, stock ETFs, and constituents of the CSI 300 as collateral to exchange for highly liquid assets such as government bonds and central bank bills from the central bank.

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The initial swap facility operation will be 500 billion yuan, with the possibility of expanding the scale in the future. "I told Chairman Wu Qing of the CSRC that if this goes well, we can do another 500 billion yuan, or a third 500 billion yuan, and our attitude is open."

He also pointed out that funds obtained through this tool can only be used for investment in the stock market.

The second tool is the Stock Repurchase and Increase in Holdings Re-lending Facility. This tool guides commercial banks to provide loans to listed companies and major shareholders for the repurchase and increase in holdings of listed company stocks. It is applicable to listed companies with different ownership structures, including state-owned enterprises, private enterprises, and mixed-ownership enterprises, without distinguishing between ownership types. The initial quota is planned to be 300 billion yuan, and further assessments will be made based on market conditions.

Is the swap facility a type of stabilization fund? What is the difference between the swap facility and the stabilization fund? At the press conference, Pan Gongsheng responded to the "creation of a stabilization fund" by saying it is "under study."

Tian Xuan, the Deputy Dean of the PBCSF School of Finance at Tsinghua University, told reporters that the swap facility should not be seen as a disguised stabilization fund. This is because a stabilization fund refers to a fund established by the government or related institutions to stabilize the market, mainly by buying and selling securities to suppress market fluctuations and act as a direct market stabilizer.

The PBOC's swap facility tool is mainly aimed at improving the liquidity of financial institutions and indirectly having a positive effect on the capital market. The initial swap facility operation of 500 billion yuan reflects the PBOC's determination and courage to support market liquidity, which will boost market confidence, promote market transactions, and enhance market liquidity.

Specifically, Wen Bin, Chief Economist of China Minsheng Bank, believes that the improvement of financial market liquidity through the swap facility is mainly reflected in the downward range of stock market trends. He believes that it is expected that securities, funds, and insurance companies can use the swap facility tool to adjust their stock positions more flexibly. Some poorly performing stocks have poor liquidity, and securities, funds, and insurance companies can use the swap facility to reduce the additional costs generated during position adjustments. It is more convenient to obtain the funds needed for position adjustments, and re-purchasing stocks at low prices after the swap is completed is also beneficial for reducing the overall holding cost. It is expected that the swap facility tool will be more favored when the stock market is sluggish, helping securities, funds, and insurance companies to obtain funds in a timely manner for position adjustments and increases, thereby promoting market trend stabilization and recovery.

Can this policy tool be included in long-term or normalized use in the future? Liu Tao, a senior researcher at the Guangkai Chief Industry Research Institute, said that the central bank's creation of the securities, fund, and insurance company swap facility, the creation of special re-lending, and guiding banks to provide loans to listed companies and major shareholders to support stock repurchase and increase holdings, shows that the central bank continues to adhere to the principle of "focusing on key points, reasonable moderation, and advancing and retreating." Following the two new tools of scientific and technological innovation and technical transformation re-lending and affordable housing re-lending established in the first half of the year, it has targeted the difficulties and pain points of the current capital market and guided financial institutions to strengthen credit investment in various parties of the capital market in a market-oriented manner, which is conducive to further stabilizing and boosting the development confidence of the capital market.In the future, there may be consideration for "another 500 billion," the "third 500 billion," which indicates that the People's Bank of China has a positive attitude towards the swap facility tool, and is considering it in a far-reaching manner. Given the good initial effects, this swap facility tool is likely to become an important part of a normalized market mechanism, expanding the channels for financial institutions to support funds and helping the capital market to continue to develop in a healthy and stable manner.