Update: Four Things to Know About PBOC’s New Swap Facility to Boost Stocks

[para. 1][para. 2] China's central bank, the People’s Bank of China (PBOC), has launched the Securities, Funds and Insurance Companies Swap Facility (SFISF), granting eligible financial institutions access to liquid assets to purchase shares in companies listed on Chinese mainland stock exchanges. This tool is part of a broader package of economic stimulus measures aimed at enhancing the capital markets' stability and health.

[para. 3] Announced by PBOC Governor Pan Gongsheng at a briefing on September 24, the SFISF is introduced alongside other economic support measures such as support for the real estate market, a reduction in banks' reserve requirement ratio, and interest rate cuts. Initially, the facility will provide 500 billion yuan ($70.6 billion) in liquidity and serves as one of two PBOC tools intended to support the stock market.

[para. 4][para. 5] The announcement coincides with volatile stock market activity following the National Day holiday. After rising sharply, the Shanghai Composite Index experienced a significant drop as the market was disappointed by a lack of new fiscal measures from the National Development and Reform Commission. The market slightly recovered when the finance minister was scheduled to discuss fiscal measures, and with the SFISF launch, the Shanghai Composite showed an increase, though the Shenzhen Component Index dipped.

[para. 6][para. 7] The SFISF allows securities firms, mutual fund companies, and insurers to pledge bonds, exchange-traded funds, and CSI 300 Index constituent shares to the PBOC for liquid assets like central government bonds. Analysts predict these assets can then be utilized to secure funds for further stock market investments. Operations are expected to run through primary market dealers, potentially involving state-owned firms.

[para. 8][para. 9] The SFISF shares similarities with the U.S. Federal Reserve's Term Securities Lending Facility (TSLF), which also enables exchanging illiquid securities for Treasury securities to boost liquidity. Such mechanisms enhance institutions' funding and investment capabilities, potentially using secondary market leverage to increase available financing.

[para. 10] The SFISF's initial fund allocation is 500 billion yuan, as previously stated by Pan, with the potential for expansion depending on economic developments. Although not specified, further increments, each up to an additional 500 billion yuan, are possible if deemed effective. The facility has a one-year term, with provisions for extension and an expanded asset scope for eligible institutions.

[para. 11][para. 12] While the SFISF enhances financial institutions’ leverage and stabilizes the market, analysts caution that PBOC initiatives alone may not address the market's fundamental trends, largely influenced by broader economic conditions and company performance. Despite its limited initial scale relative to long-term stock market funds, the tool is expected to significantly increase participating institutions' capacity to secure investment funds, thereby enhancing market liquidity and activity.

[para. 12] For further information or inquiries, the report lists Zhang Yukun as the contact reporter via their Caixin email address and Nerys Avery as the editor, also accessible through their Caixin email.