China's First Monetary Policy Tool to Support the Capital Market Launched
ISSUING AUTHORITY:
People's Bank of China
DATE OF ISSUANCE:
October 10, 2024
EFFECTIVE DATE:
October 10, 2024
On October 10th, the People's Bank of China (PBOC) announced the creation of the "Securities, Fund, and Insurance Company Swap Facility" (referred to as the "Swap Facility"), designed to enable eligible securities, fund, and insurance firms to exchange assets like bonds and ETFs for more liquid, high-quality assets such as government bonds and central bank notes. The program will start with an operational scale of 500 billion yuan, with potential for future expansion.
This initiative is China's first monetary policy tool focused on supporting the capital market. Experts consider it a complex endeavor that requires significant infrastructure and technical capabilities, along with coordinated policy efforts.
The Swap Facility is in line with the goals set during the third plenary session of the 20th Party Congress, aiming to bolster the capital market's resilience and mitigate herd behavior. It also invites greater participation from non-bank institutions and enhances the effectiveness of monetary policy transmission.
PBOC Governor Pan Gongsheng has noted that government bonds are more liquid compared to many assets held by financial institutions. This facility will help these institutions improve their liquidity and boost stock investments.
The Swap Facility permits a maximum term of one year, with options for extension and a flexible range of collateral. Importantly, this mechanism does not increase the base currency supply, complying with PBOC regulations that prohibit direct lending to non-bank financial entities, thereby promoting stability without expanding the monetary supply.
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