(Bloomberg) -- China said it will allow institutional investors to tap central bank financing for stock purchases and is weighing plans for a market stabilization fund, sparking the biggest rally since 2020 for the nation’s beaten-down equities.
The People’s Bank of China will set up a swap facility allowing securities firms, funds and insurance companies to tap liquidity from the central bank to purchase equities, Governor Pan Gongsheng said at a briefing on Tuesday. There are also plans to set up a specialized re-lending facility for listed companies and major shareholders to buy back shares and raise holdings.
The moves will unleash at least 800 billion yuan ($113 billion) of initial liquidity support, though some analysts questioned whether that will be enough to fuel longer-term market gains amid weak economic growth. The CSI 300 Index, a benchmark of onshore Chinese stocks, surged 4.3% to cap its best day since July 2020. In Hong Kong, a gauge of Chinese shares was up more than 5% intraday.
The steps mark the latest effort to stem a selloff in the stock market, after previous measures failed to drive a sustainable rebound. Authorities also cut the amount of money banks must hold in reserve and reduced a key policy rate as part of a push to help the economy meet the official annual growth target of around 5%.
“What surprised the market is the clear direction and funding from the PBOC in being a firm liquidity resort to prop up the stock market,” said Linda Lam, head of equity advisory for North Asia at Union Bancaire Privee in Hong Kong. “In the near term, Chinese capital markets should enjoy a sweet liquidity honeymoon period, while China is buying time to fix more deep-seated growth problems.”
Beijing’s liquidity support for the stock market will come in the form of a 500 billion yuan swap facility and a 300 billion yuan re-lending facility. Pan said authorities may add another 500 billion yuan in phases.
“This is probably the most aggressive sentiment booster that the PBOC and market regulators can introduce before the US election,” said Homin Lee, senior macro strategist at Lombard Odier Singapore Ltd. “The overall packaging of these measures was done quite well, with helpful guidance for more easing down the road.”
More details on the swap facilities:
- Eligible securities firms, funds and insurance companies will be allowed to use their holdings of bonds, stock ETFs, CSI 300 constituent stocks and other assets as collateral to obtain high-liquid assets such as government bonds and central bank bills from the PBOC
- The swap for more liquid assets “will significantly increase institutions’ ability to acquire funds and buy stocks,” Pan said
- Funds obtained through this instrument can only be used to invest in the stock market, he added
- The re-lending facility is aimed at guiding commercial banks to provide loans to listed companies and major shareholders for the purpose of buying back or increasing their holdings of shares of listed companies
- This tool is applicable to listed companies with different ownerships such as state-owned enterprises, private enterprises as well as mixed ownership enterprises
Beijing has been weighing the formation of a state-backed stabilization fund since at least October, although some investors doubt it’ll be effective given that previous rescue efforts had limited impact. Sentiment remains depressed as a result of China’s long-running property crisis, weak consumer sentiment and falling prices.
“They have used this tool when the 2015 bubble burst,” said Hao Hong, chief economist at Grow Investment Group. “The potential funding can be considered unlimited because it is coming from the central bank. But I doubt many fund companies would borrow aggressively to tap this facility at this stage.”
State funds have purchased over $80 billion worth of onshore exchange-traded funds so far in 2024, according to estimates by Bloomberg Intelligence, in an attempt to prop up share prices. Regulators have also introduced tighter restrictions on short selling and quantitative trading to reduce volatility and prevent a downward spiral.
In April, authorities announced what analysts said was a once-a-decade capital-market reform plan which encouraged firms to boost dividend payments, improve the quality of new stock offerings and plug corporate governance loopholes. Earlier in February, China appointed Wu Qing as the head of its securities regulator in a surprise move.
China’s 10-year government bond yield climbed three basis points to as high as 2.07%, after sliding to 2% for the first time on record earlier on Tuesday, as investors preferred riskier assets. The yuan also benefited from the improved sentiment, rising toward the key 7-per-dollar level in both onshore and overseas trading.
Still down more than 2% in 2024, the CSI 300 Index is heading for an unprecedented fourth year of losses. In all, more than $6 trillion has been wiped out from the market value of Chinese and Hong Kong stocks since a peak reached in 2021.
“The measures can raise more funds, increase market liquidity, and can also improve market confidence to a certain extent in the short term, but it cannot change the market trend,” said Zhou Nan, founder and investment director at Shenzhen Longhui Fund Management Co. “There is a high probability that in the short and medium term, the market will have to fall further before it bottoms out.”
--With assistance from Abhishek Vishnoi, Tian Chen, Charlotte Yang and Winnie Hsu.
(Updates with CSI’s move at close.)
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