China Considers Stock Stability Fund and Releases $113 Billion from PBOC

(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.

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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 buy stocks, Governor Pan Gongsheng said at a briefing on Tuesday. There’s also a plan 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 relending 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 1.8% following the announcement. In Hong Kong, a gauge of Chinese shares climbed more than 3%.

“Expanding liquidity for the stock market through new financial instruments will stimulate an increase in trading activity in the short term, but the fundamental performance of listed companies in the stock market will not change,” said Shen Meng, a director at Beijing-based boutique investment bank Chanson & Co. “So the measures might stimulate asset price bubbles, which are not good for the healthy development of the stock market.”

The steps are the latest effort to revive investor sentiment and stem a selloff in the stock market, after previous measures failed to drive a sustainable rebound. A slew of disappointing data in August raised concerns that President Xi Jinping’s government could miss its annual growth target of around 5% without unleashing more support.

The CSI 300 Index is among the world’s worst-performing major indexes, having fallen about 5% this year. It is headed for an unprecedented fourth year of losses.

“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.”

The formation of a state-backed stabilization fund has been contemplated since at least October, though some investors have raised doubts over its efficacy as Beijing’s previous rescue efforts haven’t always worked. China’s property crisis, depressed consumer sentiment, tumbling foreign investment and diminished confidence among local businesses after years of volatile policymaking are exerting pressure on both the economy and markets.

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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 saw as 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.

“This kind of 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 Long Hui Fund Management Co., referring to Tuesday’s announcements. “There is a high probability that in the short and medium term, the market will have to fall further before it bottoms out. The continuous decline in A-share market and the fact that most of the funds in the market are losing money, resulted in a serious lack of confidence in the entire market.”

–With assistance from Abhishek Vishnoi.

(Updates with details in fifth paragraph and background from ninth paragraph)

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