(Bloomberg) — China is weighing plans for a stock stabilization fund, and will unleash at least 800 billion yuan ($113 billion) of initial liquidity support for its beleaguered equity market. Mainland and Hong Kong shares jumped.
Most Read from Bloomberg
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.
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.
The CSI 300 Index, a benchmark of onshore Chinese stocks, rallied as much as 4% following the announcement to head for its best day since March 2022. In Hong Kong, a gauge of Chinese shares surged almost 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.”
The steps mark the latest effort to revive investor sentiment and 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 move to help the economy meet the official annual growth target of around 5%.
“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.”
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
“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.”
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.
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 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 almost 3% this year, the CSI 300 Index is heading for an unprecedented fourth year of losses.
The measures may boost trading in the short term but could also “stimulate asset price bubbles, which are not good for the healthy development of the stock market,” said Shen Meng, a director at Beijing-based boutique investment bank Chanson & Co.
–With assistance from Abhishek Vishnoi, Tian Chen and Charlotte Yang.
(Updates CSI’s move.)
Most Read from Bloomberg Businessweek
©2024 Bloomberg L.P.