On September 24, the Shanghai Composite Index rose by 4.15%, marking its highest single-day gain in four years and recovering the 2,700 and 2,800 points while nearing 2,900. This significant asset price surge is undoubtedly linked to the State Council’s press conference on financial support for high-quality economic development. People’s Bank of China Governor Pan Gongsheng, along with the heads of the National Financial Regulatory Administration and the China Securities Regulatory Commission, provided insights into the financial measures aimed at supporting economic growth.
Governor Pan outlined three key monetary policy tools: reserve requirement cuts, interest rate reductions, and special monetary instruments to support the stock market. Initially, his remarks did not spark a major market rally; however, by the end of the Q&A session, market sentiment dramatically shifted. The government bond futures market saw substantial declines, while both the Shanghai and Shenzhen markets surged, with K-line charts showing continuous upward movement.
The first tool introduced is the swap facility for securities, funds, and insurance companies, allowing eligible institutions to use their holdings—such as bonds, stock ETFs, and components of the CSI 300—as collateral to swap for high-liquidity assets like government bonds and central bank bills. This mechanism enhances liquidity for institutions holding less liquid assets, significantly improving their funding and stock-buying capabilities. The initial operation scale is set at 500 billion yuan, with the potential for expansion.
The second tool involves guiding commercial banks to provide loans to listed companies and major shareholders for stock repurchases and increases in shareholding. This reflects a common practice in international capital markets. The central bank will issue re-loans to commercial banks at a rate of 1.75%, with banks likely charging around 2.25% to clients. The initial quota for this tool is 300 billion yuan, with possibilities for further rounds based on market conditions.
These announcements are evidently pivotal in stimulating the market. Since June 2023, a series of rate cuts have not spurred widespread capital market growth, unlike this recent announcement.
Firstly, the potential scale of these tools could reach trillions of yuan, comparable to the steady fund discussions. With planned additional government bond issuances of 2 trillion yuan in 2023 and 2024, the extraordinary scale of these measures stands out.
Secondly, the first tool’s mechanism—swapping securities for government bonds—is unprecedented in China and abroad. It allows non-bank financial institutions to exchange their assets for government bonds, which can then be sold to acquire equities. This strategy not only provides liquidity but also identifies the buying capacity for quality stocks, placing the investment risk on the institutions themselves.
Thirdly, the second tool provides loans at a low cost of 2.25%, enabling companies to repurchase shares, thereby injecting significant liquidity into the market. This policy is notably expansive, allowing funds to enter the stock market where previously there were restrictions.
However, long-term upward movement in stock prices ultimately hinges on fundamental economic performance. Investors should be cautious, especially amid current market euphoria, and consider strategic exits when appropriate. These tools differ from steady funds; only profitable enterprises and institutions will engage in such activities. If economic growth falters, the stock market may quickly decline during deleveraging phases, creating potential risks. The downward adjustment of mortgage rates may not sufficiently deter early repayments by households, maintaining considerable pressure on monetary supply.
Patience is crucial; there is no such thing as a free lunch.