China has announced a significant financial intervention aimed at stabilising its equity markets, allowing institutional investors to leverage central bank financing for stock purchases.
This move, reported by Bloomberg, will be supported by the creation of an 800 billion yuan ($113 billion) market stabilization fund. The fund's objective is to provide much-needed liquidity to China's struggling markets.
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Promote market liquidity: reduce deposit reserve ratio and policy interest rate
To kickstart the initiative, Beijing has allocated a 500 billion yuan swap facility and a 300 billion yuan re-lending facility, with the potential for an additional 500 billion yuan ($71.31 billion) to be phased in over time. These measures are designed to ensure that institutional investors have the capital required to invest in stocks, with the central bank playing a key role as a liquidity provider.
The announcement has already had a profound effect on Chinese markets. The Hang Seng Index (HSI), which comprises 82 major companies in China and Hong Kong, surged 17.4% in response. This significant rally erased more than 13 months of losses in just over two days, demonstrating the positive market sentiment triggered by the announcement.
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Real estate market policy: lower existing mortgage interest rates and unify down payment ratios
To further support the real estate market, the People's Bank of China will guide commercial banks to lower existing mortgage interest rates to close to new loan interest rates, with an average reduction expected to be approximately 0.5 percentage points. In addition, the minimum down payment ratio for mortgage loans for first and second homes will be unified across China, and the current minimum down payment ratio for second homes will be lowered from 25% to 15%.
At the same time, the 300 billion yuan affordable housing refinancing policy created in May will also be optimized, and the People's Bank of China's financial support ratio for banks will be increased from the original 60% to 100%.
In addition, operating property loans and "Financial Article 16" policy documents that were originally due at the end of the year will be extended to the end of 2026 to provide longer-term stable support for the market.
Stock markets stabilize: New monetary policy tools come online
To support the stable development of the stock market, the People's Bank of China will create new monetary policy tools.
The first is to establish swap facilities for securities, funds, and insurance companies to support qualified financial institutions in obtaining liquidity from the central bank through asset pledges and enhance the institutions' ability to obtain funds and increase stock holdings.
The second policy is to launch special re-loans for stock repurchases and shareholding increases, and encourage banks to provide loans to listed companies and major shareholders to support repurchases and shareholding increases.
Through this series of new policies, the People's Bank of China and the State Administration of Financial Supervision hope to stabilize the financial market while supporting the healthy development of the real estate market and promoting steady economic growth.
These measures are expected to bring greater vitality and stability to the market and help China achieve its high-quality development goals.
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The People's Bank of China's move has caused huge repercussions in the Asian economy
The CSI 300, an index tracking the 300 largest companies in China, also experienced a sharp increase, rising by 12.84% since the news broke. Investors have responded positively to the clarity and commitment of the People's Bank of China (PBOC) in providing liquidity to boost the stock market.
Linda Lam, head of equity advisory for North Asia at Union Bancaire Privée in Hong Kong, commented on the market's reaction:
"What surprised the market is the clear direction and funding from the PBOC in being a firm liquidity resort to prop up the stock market. In the near term, Chinese capital markets should enjoy a sweet liquidity honeymoon period, while China is buying time to fix more deep-seated growth problems."
Lam’s remarks highlight that while the liquidity injection has provided short-term relief, China’s economy still faces structural challenges that need to be addressed. Nevertheless, the market appears to be enjoying the current boost in confidence as investors adjust to this new phase of support from the government.
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