China's central bank's new scheme offers liquidity through asset swaps.
Key Takeaways
- China's central bank has launched a ¥500B scheme to support the stock market.
- Financial institutions can use various assets as collateral under the new funding scheme.
The People’s Bank of China (PBOC) has established a ¥500 billion ($70.6 billion) funding scheme to support the Chinese capital market. This allows financial institutions such as brokers, mutual funds, and insurers to access liquidity to purchase shares, using their existing stock holdings as collateral.
Participants in the swap facility can use assets like bonds, stock ETFs, and holdings in CSI 300 Index constituents as collateral to obtain liquid assets such as treasury bonds and central bank bills.
The program could be expanded with additional rounds of funding if the initial implementation proves successful, Governor Pan Gongsheng said on Sept. 24. He noted that the PBOC was considering adding another ¥500 billion, which could lead to a total liquidity injection exceeding ¥1 trillion.
The move comes in response to prolonged declines in the Chinese stock market. China’s central bank aims to bolster investor confidence amid broader economic challenges.
The scheme was first announced in late September after the PBOC unveiled a series of monetary easing measures. The central bank said it would cut the required reserve ratio for banks by 0.5%, lowering it from 7% to 6.5%, and would also reduce the seven-day reverse repo rate from 1.7% to 1.5%.
Following the initial announcement of the scheme and the measures, market sentiment reacted positively, with major rallies observed in Chinese stock indices. The planned monetary stimulus also boosted US and European stock markets.
On the crypto markets, Bitcoin broke its downtrend following the news of China’s pandemic-level stimulus package and recent US Fed rate cuts. However, Bitcoin retreated earlier this week due to China’s lack of new stimulus measures at a recent briefing.
Concerns about Middle East conflicts and profit-taking also contributed to the market downturn. Analysts warn that the latest Chinese stimulus may not sustain momentum compared to previous cycles.
However, with China officially kicking off its plan, Bitcoin is expected to move higher given that historically, similar actions have led to over 100% increases in Bitcoin’s price. QCP Capital predicted that further China stimulus might enhance bullish sentiment in crypto and other risk assets.
Bitcoin is trading at around $60,800, up slightly in the last two hours, according to CoinGecko data.
Crypto traders now set their eyes on the September Consumer Price Index (CPI) report, scheduled to be released tomorrow at 8:30 AM ET, for potential price movement cues.
The year-over-year inflation rate is projected to decrease to 2.3% from 2.5% in August while the core CPI is expected to rise by 0.2% monthly and maintain a year-over-year increase of 3.2%.