China Considers Stock Stabilization Fund, Injects $113 Billion Liquidity Support

China Considers Stock Stabilization Fund, Injects $113 Billion Liquidity Support

China is exploring the creation of a stock stabilization fund and will inject at least 800 billion yuan ($113 billion) of liquidity into its struggling equity market. This move, announced by the People’s Bank of China (PBOC), aims to boost investor confidence and support the market, which has been under pressure in recent months. Mainland Chinese and Hong Kong stocks surged following the news, with the CSI 300 Index climbing as much as 4%, marking its best performance since March 2022. In Hong Kong, Chinese shares rallied nearly 5%.

PBOC Governor Pan Gongsheng revealed that the central bank will establish a swap facility that will allow securities firms, funds, and insurance companies to access liquidity to buy equities. This facility is expected to unlock 500 billion yuan, with an additional 300 billion yuan through a re-lending program, enabling companies and shareholders to repurchase shares or increase holdings. Pan added that the central bank may expand the program with an additional 500 billion yuan if necessary.

"This clear direction and liquidity support from the PBOC are surprising, signaling a firm commitment to stabilizing the stock market," said Linda Lam, head of equity advisory for North Asia at Union Bancaire Privee. She noted that this may lead to a short-term “liquidity honeymoon” in China’s capital markets.

These actions are the latest in a series of attempts by Chinese authorities to halt the stock market's decline and improve investor sentiment. Earlier measures, including cuts to banks' reserve requirements and policy rates, have yet to generate a lasting market rebound. The government is targeting an annual growth rate of around 5%, and this latest effort is part of a broader strategy to support the economy.

However, not all analysts are optimistic. Zhou Nan, founder of Shenzhen Longhui Fund Management Co., believes that while these moves will improve liquidity and bolster confidence temporarily, they may not reverse the overall market trend. "In the short and medium term, the market may have to decline further before finding a bottom," Zhou said.

Under the swap facility, eligible firms can use assets such as bonds, stock ETFs, and CSI 300 Index stocks as collateral to obtain liquid assets like government bonds from the central bank. This will enhance their ability to purchase stocks, Pan said, with the funds specifically directed for investment in the equity market.

Additionally, the re-lending facility is designed to guide commercial banks in offering loans to listed companies and major shareholders for stock buybacks or increased holdings. The facility is open to state-owned, private, and mixed-ownership companies, similar to a tool employed during the 2015 market crisis, noted Hao Hong, chief economist at Grow Investment Group.

Despite the scale of the intervention, some remain skeptical about its long-term effectiveness. China has previously implemented rescue efforts with limited success. Investor sentiment remains weak, driven by the country’s ongoing property crisis, low consumer confidence, and deflationary pressures.

State funds have already purchased more than $80 billion worth of onshore exchange-traded funds in 2024, according to Bloomberg Intelligence. Regulators have also tightened restrictions on short selling and quantitative trading to curb market volatility.

The announcement follows a major capital-market reform plan introduced in April, aimed at improving corporate governance, boosting dividends, and raising the quality of stock offerings. In February, China surprised analysts by appointing Wu Qing as the new head of its securities regulator.

The recent measures have also influenced other markets. China's 10-year government bond yield climbed to 2.07%, up three basis points after hitting a record low earlier in the day. The yuan strengthened toward the 7-per-dollar level in both onshore and overseas markets, reflecting improved market sentiment.

While the PBOC's moves may temporarily boost market activity, some experts, such as Shen Meng from Chanson & Co., warn that it could lead to asset bubbles, which may ultimately hinder the stock market’s long-term development.