In a bid to invigorate the stock market and provide support for a slowing economy, China’s central bank has launched a liquidity swap facility aimed at institutional investors. This initiative is part of a broader stimulus package that has already ignited a significant rally in equities.
Liquidity Facility Announcement
The People’s Bank of China (PBOC) announced that eligible securities firms, funds, and insurers can start applying for liquidity support beginning Thursday. Under this program, these institutions can obtain highly liquid assets, such as government bonds and central bank bills, by providing specific collateral. The initial size of this facility is set at 500 billion yuan (approximately $70.6 billion), with the potential for future expansion, according to a statement from the monetary authority.
Stimulus Package Context
PBOC Governor Pan Gongsheng unveiled this mechanism as part of a broader stimulus initiative last month, signaling the government’s commitment to address the slowing economy. This announcement has fueled a remarkable rally in the stock market, with shares rising as much as 30%.
Designated Use of Funds
According to Pan, funds acquired through this facility are designated solely for investment in the stock market. The PBOC specifies that bonds, stock exchange-traded funds (ETFs), and shares from the CSI 300 index can be utilized as collateral.
Market Reactions and Investor Sentiment
The latest announcement comes in response to a cooling rally in the stock market, attributed to the absence of immediate fiscal stimulus following the recent weeklong national holiday. Investors are now looking forward to a press briefing by Finance Minister Lan Fo’an on Saturday, which is expected to provide insights into potential measures to enhance government borrowing and spending aimed at bolstering economic growth.
Bullish Sentiment Revived
According to Dilin Wu, a research strategist at Pepperstone Group, the PBOC’s swap facility has “revived bullish sentiment” in the market. In morning trading on Thursday, the CSI 300 Index rose by 2.9%, recovering from significant losses experienced the previous day.
Insurers as Primary Applicants
Insurers are anticipated to be the primary applicants for this liquidity tool, as their equity holdings align with the collateral requirements set by the PBOC. Wu Xuan, a fund manager at Borui Funds Management, noted that regulators view insurance funds as a vital source of long-term investment in the market. “They are shouldering more of a ‘political task,’” Wu remarked, adding that more detailed announcements are expected in the coming weeks, with the first utilization of the tool likely within two to three months.
Expert Opinions on Market Support
Serena Zhou, a senior China economist at Mizuho Securities Asia Ltd., expressed that while the policy is expected to support the market, she would not directly correlate the timing of the policy with stock performance.
Challenges in Consumer Spending
In recent months, authorities have intensified their support for the equities market and the broader economy, responding to waning growth momentum that threatens Beijing’s target of around 5% economic expansion for the year. Consumer spending remains subdued and is further pressured by a weakening labor market.
Wage and Spending Declines
Data from Zhaopin Ltd., an online recruitment platform, indicates that wages for new hires in China have declined after two consecutive quarters of increases. Additionally, tourist spending during the long holiday in October has fallen short of pre-pandemic levels.
Conclusion
The establishment of the liquidity swap facility by the PBOC is a strategic move to boost investor confidence and support the stock market amidst economic challenges. As the government intensifies its efforts to stimulate growth, all eyes will be on the upcoming announcements from finance officials and the response from institutional investors in the days ahead.
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