China's Central Bank Launches Funding Scheme

HONG KONG/SHANGHAI (Reuters) – On Thursday, China's central bank announced that it would begin accepting applications from financial institutions for a new funding scheme, initially valued at 500 billion yuan ($70.62 billion) to support the capital market.

The People's Bank of China (PBOC) stated that eligible securities firms, fund companies, and insurers can apply to participate in the swap scheme, which facilitates easier access to funding for purchasing stocks.

This announcement follows a drop in Chinese stocks after a significant rally, as investor enthusiasm regarding Beijing's economic revival plans began to fade.

> "The swap facility is designed to provide liquidity support to non-bank financial institutions and can help lift confidence in the stock market," said Ming Ming, an analyst at Citic Securities.

Background of the Scheme

The PBOC first revealed this initiative on September 24 as part of a broader package of measures aimed at stimulating the economy and enhancing capital markets.

Under the swap facility, eligible firms can exchange their assets, including bonds, stock ETFs, and holdings within the CSI 300 Index, as collateral for highly liquid assets such as treasury bonds and central bank bills.

The initial scale of the swap programme is set at 500 billion yuan but may be expanded later.

Regulatory Insights

Creating this facility does not imply that the central bank is directly entering the stock market, as there will be no increase in the base money supply or an expansion of the PBOC's balance sheet. This was emphasized by Xu Zhong, an official from China's interbank market regulatory body, who stated in a recent article:

> "It remains a red line that bank loans cannot illegally enter the stock market."

Xu, who is also the vice president of the National Association of Financial Market Institutional Investors, compared this initiative to the Federal Reserve's Term Securities Lending Facility (TSLF), established during the global financial crisis to alleviate funding pressures faced by primary dealers.

Market Implications

Ming from Citic noted that by allowing financial institutions to swap equity assets for treasuries, the central bank can influence the stock and bond markets simultaneously. Shujin Chen, a China economist at Jefferies, indicated that while the swap programme could enhance leverage in the stock market, there already exist multiple tools to achieve similar goals.

> "The biggest concern is how many institutions would like to participate in this swap," Chen remarked, citing a lack of operational details about the scheme.

> ($1 = 7.0800 Chinese yuan)