China’s central banks announced two new funding schemes for its stock market on Friday. The bank aims to inject up to 800 billion yuan (111.238 billion dollars) into the market.
These initiatives, launched by the People’s Bank of China, are intended to promote “steady growth” of the nation’s financial markets.
New tools boost market stability
The recently launched swap and refinancing schemes, originally proposed in late Septembre, are part of China’s broader strategy for stabilizing its financial markets.
Investors’ optimism over government stimulus has turned into caution, and the recent bull market in the country has begun to lose momentum.
Despite this, CSI300 Index, the benchmark index, saw a positive turn on Friday morning, closing the session 0.8% higher.
The swap scheme, worth 500 billion yuan allows brokers, fund managers and insurers to obtain liquidity from the central banks by using assets to purchase stocks as collateral.
According to the PBOC 20 companies have been approved for participation, with initial requests exceeding 200 billion yuan.
Xinhua Financial reported that “the swap scheme will become a stabilizing tool for the market”, explaining that the demand for this tool will increase when stocks are oversold. However, the appetite for this tool will decrease as markets recover.
This facility also allows institutions to ensure liquidity during market downturns, without having to sell shares for a loss.
The swapping of liquid assets, such as Treasury bonds and central bank notes, can be done for eligible assets, including bonds, stock ETFs and holdings within the CSI300.
Relending scheme supports share buybacks
The PBOC has also launched a 300-billion-yuan refinancing scheme that allows financial institutions to borrow money from the central bank in order to finance share purchases by listed companies and their major shareholders.
With a one-year interest rate set at 1.75%, 21 institutions–including policy and commercial banks–are eligible to apply for the loans at the start of each quarter.
Listed companies can borrow up to 2.25% from banks for share buybacks or purchases.
This scheme is an exception from China’s usual restrictions regarding bank lending on the stock market.
China’s financial regulators urged the swift implementation of these expansive policy to support its economy and capital markets.
This post China’s Central Bank Launches $112 Billion Schemes to Boost Stock Market may be modified as new developments unfold.
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