State-Owned Brokerages Take the Lead? 500 Billion Yuan Swap Facility Draws Attention (AI Translation)

中字头券商打头阵？5000亿元互换便利引关注

The People’s Bank of China (PBoC) has announced the creation of a new monetary policy tool called the Securities, Funds, and Insurance companies Swap Facility (SFISF) to support eligible non-banking institutions like securities, fund, and insurance companies. This tool allows these entities to use assets like bonds and stock ETFs as collateral to obtain high-grade liquid assets such as government bonds from the PBoC. The initial scale of operations is set at 500 billion yuan with the potential for expansion [para. 1][para. 3]. Applications are currently being accepted, but non-bank institutions not listed as primary dealers may need to operate indirectly via China Bond Insurance [para. 1][para. 3].

The establishment of the SFISF follows the PBoC’s previous introduction of the Central Bank Bills Swap in 2019, which supported banks in issuing perpetual bonds [para. 3]. SFISF represents an innovation as it involves complex infrastructures demanding high operational efficiency [para. 5]. Securities firms like CITIC Securities, China International Capital Corporation, and others are reportedly actively participating in the early application process, yet many details remain confidential. These leading firms have reportedly been instructed by regulators to undertake these pilot applications [para. 4].

The actual success and extent of SFISF's impact are anticipated to depend on the readiness and willingness of eligible institutions to utilize this swap facility. The tool inherently differs from lending facilitation, where the central bank does not directly supply funds but facilitates asset swaps indirectly for financing and potentially reinvestment in the stock market [para. 6].

Zhou Guannan, a chief analyst, explains that although swap facilities do not result in asset ownership transfer, they do channel capital into the capital market. The scale of incremental funds allowed into the equity market will consequently depend on institutions’ active or passive roles in utilizing these facilities [para. 9]. Fund companies may exhibit limited interest due to the composition of funds and internal allocation decisions, which largely avoid stock or ETF purchases [para. 11][para. 12].

Insurance company representatives have shown little interest in applying for SFISF, primarily because existing leverage tools meet their needs adequately. Current leverage utilization in the insurance industry is around 5%, although insurance companies have a regulatory allowance of up to 20% [para. 14][para. 15]. Insurance funds are therefore modifying their investments mainly in fixed-income assets rather than equities [para. 16].

In contrast, securities firms demonstrate a higher motivation to participate given their need to optimize return on equity investments. Their proprietary equity exposure is limited due to leverage considerations which are generally below net capital [para. 22][para. 23]. Indeed, it advances more on their financial status and stock market expectations [para. 26].

The broader impact of SFISF on the market hinges on China's macro-economic conditions. The program's success will further depend on subsequent policy measures and the country's economic environment restoration to its potential growth trajectory [para. 28]. As a result, securities firms might heavily leverage equity assets to invest in the stock market again, focusing closely on market trends and equity value movements [para. 27][para. 29].