THE People’s Bank of China (PBOC) unveiled China’s first monetary policy tool supporting the capital market, with an initial size of 500 billion yuan (US$70.8 billion).

The PBOC has created the Securities, Funds and Insurance companies Swap Facility, or SFISF, for “the healthy and stable development of the capital market,” the central bank announced Thursday.

The funds acquired via the tool can only be invested into the stock market and its scale can be expanded depending on market conditions, as per central bank governor Pan Gongsheng, who first announced the plan to create the swap tool Sept. 24.

The SFISF will allow eligible securities, funds, and insurance companies to use assets, including bonds, stock exchange-traded funds (ETFs), and holdings in constituents of the CSI 300 Index as collateral in exchange for highly liquid assets such as treasury bonds and central bank bills, the PBOC noted, adding that it has begun accepting applications.

The SFISF will last for one year and allows for renewals upon expiry, according to people close to the PBOC.

The operating flexibility indicates that the tool will have a huge space to play its role in the future, they noted, adding that the central bank will carry out operations via specific tier-one traders, with China Bond Insurance potentially being one.

The SFISF enables non-banking institutions to substitute their assets of poorer liquidity for government bonds and central bank bills to facilitate buybacks or fundraisers through sales, according to experts.

It will not increase base money supply and does not belong to quantitative easing as it only involves swaps of different kinds of securities, they pointed out.

Based on the Term Securities Lending Facility, a similar tool the U.S. Federal Reserve launched during the subprime mortgage crisis in 2008, swap tools can play a key role in stabilizing the financial market, the experts noted.

Nevertheless, chief economist Li Xunlei of Zhongtai Securities warned that the swap tool is a double-edged sword. When market sentiment is bullish, institutions may significantly leverage themselves; while in a market downturn, they may be reluctant to use this tool to increase positions due to pessimism, failing to achieve the goal of market stabilization.

Li suggested that China should develop a professional and market-oriented institutional investor lineup, particularly pension and insurance funds, to reduce fluctuations and nurture a long-term bull market.

(SD News)