China introduces ₹112 billion in funding to stabilise the stock market

China’s central bank, the PBOC or People's Bank of China, has introduced two significant funding schemes aimed at injecting liquidity into the stock market. The initiatives, designed to promote stability and boost share market investment, will provide up to 800 billion yuan (₹112.38 billion) through newly devised monetary tools.

Central bank's plan to stabilise the market

The PBOC introduced these measures to support the steady development of China’s capital markets, which have seen fluctuating performance in recent months. The benchmark CSI300 Index reflected this volatility, ending Friday morning's session up 0.8% after initial losses. Investors had grown cautious about the size and effectiveness of Beijing’s earlier stimulus promises.

Details of the funding schemes

Under the new funding programme, the central bank has introduced two schemes: 

• Swap scheme to pump liquidity into the market

The first initiative, a swap scheme valued at 500 billion yuan, allows brokerages, fund managers, and insurers to receive liquidity from the central bank. These institutions can use asset collateralisation, such as bonds and stock ETFs, to obtain liquid assets. 

The PBOC has approved 20 companies to participate, with initial applications already surpassing 200 billion yuan. This scheme aims to stabilise the market, as it allows institutions to avoid selling shares in a declining market, preventing downward spirals.

• Lending programme to support share buybacks

The second initiative, the lending scheme, is set at 300 billion yuan. It enables financial institutions to borrow from the PBOC at a 1.75% interest rate to finance share purchases for listed companies or their major shareholders. Banks can offer loans at rates up to 2.25% to facilitate share buybacks, providing an exception to rules restricting bank lending in the stock market.

Key takeaways

1. China has introduced two funding schemes worth up to 800 billion yuan to support share market investment.
2. The swap scheme, worth 500 billion yuan, will provide liquidity by allowing institutions to collateralise assets.
3. The lending programme, initially valued at 300 billion yuan, offers financial institutions the ability to support share buybacks for listed companies.
4. Both schemes are designed to prevent market instability and encourage more robust share market investment.
5. China’s financial regulators emphasised the swift implementation of these expansive policies to stabilise capital markets.

These actions mark China’s ongoing effort to strengthen share market investment and maintain economic stability.