On October 10, China News Service reported that China has officially rolled out a new mechanism designed to stabilize its stock market. The People’s Bank of China (PBOC) has introduced the “Securities, Funds, and Insurance Companies Swap Facility” (SFISF). This initiative will enable qualified securities firms, fund managers, and insurance companies to utilize bonds, stock ETFs, and components of the CSI 300 index as collateral in exchange for high-quality liquid assets, such as government bonds and central bank bills.
The central bank has set the initial operational scale of this new tool at 500 billion yuan, with the potential for future expansion depending on market conditions. Institutions that meet the eligibility criteria can start submitting their applications right away.
During a recent press conference organized by the State Council Information Office, PBOC Governor Pan Gongsheng emphasized the notable differences in credit quality and liquidity between government bonds and central bank bills versus other assets held by market participants. Many institutions hold assets that are currently illiquid; by participating in this swap with the central bank, they can attain higher quality and more liquid assets. This move is expected to significantly enhance their funding access and enable increased stock holdings, with the stipulation that the funds obtained through this tool can only be used for stock market investments.
A source close to the central bank indicated that this new tool greatly improves funding accessibility for these institutions while restricting the swaps to stock market investments, thereby reinforcing the stabilizing effects of securities firms, funds, and insurance companies.
Interestingly, similar swap mechanisms have proven effective both in China and globally. During the 2008 financial crisis, the Federal Reserve launched the Term Securities Lending Facility (TSLF), which allowed primary dealers to use less liquid securities as collateral to borrow more liquid government bonds, thereby facilitating market financing and lifting market confidence. This tool was also employed again during the pandemic in 2020.
In 2019, the PBOC initiated the Central Bank Bill Swap (CBS) tool, permitting primary dealers to exchange perpetual bonds for central bank bills, thus enhancing the liquidity of commercial banks’ perpetual bonds and assisting them in bolstering their capital.
“It’s essential to clarify that the swap facility does not constitute direct funding,” the source noted. The People’s Bank of China Law explicitly prevents the central bank from lending directly to non-bank financial institutions. Instead, the SFISF operates on a “bond-for-bond” basis, improving the financing capacity of non-bank entities without directly inflating the monetary base.
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