In a decisive move to bolster its capital markets, China’s central bank launched two new funding schemes on Friday, designed to inject 800 billion yuan (approximately $112.38 billion) into the stock market. This initiative aims to enhance the stability and development of the capital markets, particularly amid a slowdown in the recent market bull run.
The People’s Bank of China (PBOC) unveiled the operational details of these monetary policy tools, which had been first introduced in late September. These schemes are part of a broader strategy to ensure steady growth in the capital markets and to mitigate the risks associated with volatile market conditions.
As market enthusiasm wanes and cautious sentiments emerge regarding the scale and effectiveness of Beijing’s stimulus initiatives, these funding schemes are expected to serve as crucial support. Notably, the benchmark CSI300 Index experienced a recovery on Friday, climbing 0.8% by the end of the morning session after earlier losses.
The Swap Scheme
The first initiative, the swap scheme, is initially valued at 500 billion yuan. This program allows brokerages, fund management firms, and insurers to access liquidity from the central bank by collateralizing assets to purchase stocks. Currently, 20 firms have been approved to participate in this scheme, with initial applications surpassing 200 billion yuan, according to the PBOC.
Xinhua Financial noted that “the swap scheme will become a market stabiliser” as demand for this tool increases when stocks are oversold. Conversely, the usage of this scheme tends to diminish when the market rebounds. This facility enables institutions to secure liquidity during market downturns without the need to liquidate shares at lower prices.
Participants can exchange a variety of assets, including bonds, stock exchange-traded funds (ETFs), and holdings from constituents of the CSI300 Index, for more liquid assets such as treasury bonds and central bank bills. This facilitates easier access to funding for those involved.
The Relending Scheme
The second funding initiative is a relending program worth 300 billion yuan, which allows financial institutions to borrow directly from the PBOC. The funds can be used to finance share purchases by listed companies or their major shareholders, presenting a significant opportunity for financial institutions to engage with the stock market.
The one-year interest rate for relending is set at a competitive 1.75%. A total of 21 financial institutions, including both policy and commercial banks, are eligible to apply for these loans at the beginning of each quarter. The banks can then lend to listed companies and their major shareholders at rates of up to 2.25% for share buybacks and purchases. This relending program is a notable exception to existing regulations that typically prohibit bank lending from directly flowing into the stock market.
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