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China announces ¥500bn swap facility to support stock market

Journalist: John Choong (Head of Markets and Research), Newspage

ended 10. October 2024

Overnight, China announced a ¥500bn swap facility to support their stock market which had initially seen a meteoric rise, only to plunge in a matter of days. As a result, the Shanghai Stock Exchange (SSE) and Hang Seng jumped by 2.8% and 4.0% by lunch time, respectively, paring back some of the losses seen over the past day. The SSE had fallen over 6% from its peak earlier this week, while the Hang Seng crashed over 10%.

The purpose of the swap scheme will be to allow for financial institutions to better access funding to buy stocks, particularly institutions which aren't banks and do not have the necessary amount of liquidity to inject into the stock market. With this facility, said institutions will be able to swap out less liquid assets such as ETFs for more liquid assets like treasury bonds.

These more liquid assets can then be more easily leveraged or sold for cash. As a result, the the central bank is hoping that this will give such institutions more confidence to invest in the stock market. Although, it's worth noting that this isn't necessarily a cash injection, as the PBOC's balance sheet remains the same, with the base money supply remaining stagnant.

Newspage asked analysts, economists, and traders for their thoughts on the impact of these measures, whether such moves could revive a stalling Chinese stock market, and what this could spell for the Chinese economy as a whole.

4 responses from the Newspage community

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John Choong
Head of Equities and Markets at Investors Edge
China's swap facility is a temporary band-aid for a deeper economic wound. While it may provide a short-term boost to stock prices by increasing liquidity, it fails to address the fundamental issues plaguing the Chinese economy.

The core problem remains Chinese — consumers lack incentives to take on debt. With up to 80% of private household savings tied up in a property market already in disarray, many homeowners are already facing negative equity. This discourages both consumer spending and business investment, despite the government's efforts to stimulate the market.

While the government's hope that increased institutional investment will create a positive domino effect from investments in capex and labour, this seems optimistic at best — especially when private debt is at 200% of GDP, risk appetite is low across the board. While fiscal measures might offer a more substantial solution, China's already high national debt limits this option as well.
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Wes Wilkes
CEO at IronMarket Wealth
The Chinese government appears to have released all shackles now in a bid to manufacture growth and domestic interest in its ailing stock market.

We’ve seen this before in the West. The fear is that like a junkie looking for their next hit, it is never enough to fully satisfy their habit!

That said, we see this goes one of two ways — it either works or we see China go the way of Japan into a period of stagnation for a generation.
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Gabriel McKeown
Head of Macroeconomics at The Sad Rabbit Newsletter
As China unveils its latest gambit to prop up its ailing stock market, the line between being a much-needed lifeline or merely the first card in an elaborate house destined to collapse is blurring.

The latest intervention from the PBoC comes after a tumultuous week that saw Chinese equities experience a dizzying ascent followed by a precipitous decline, erasing billions in market value. Consequently, the PBoC's actions, while providing short-term relief, may be masking deeper structural issues. The constant need for central bank support could be seen as a form of financial life support, potentially creating a dangerous dependency. With each new round of stimulus, China's central bank interventions increasingly resemble a state-sponsored Ponzi scheme, masquerading as financial alchemy.
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David Belle
Founder and Trader at Fink Money
You cannot magic demand. People have to want to buy it as a factor of opportunity cost. Take the US market. People during expectations of higher rates are still buying stocks, just more defensively. You don’t get this trade off in China. The PBoC has to focus on fixing the consumer first.