China launches first monetary policy tool to support capital market

China's central bank announced Thursday that it has decided to set up Securities, Funds and Insurance companies Swap Facility, with the initial scale of 500 billion yuan (US$71 billion) for "the healthy and stable development of the capital market."

The SFISF, which is the first monetary policy tool created by China to support the capital market, will allow eligible securities, funds and insurance companies to use their assets including bonds, stock ETFs and holdings in constituents of the CSI 300 Index as collateral in exchange for highly liquid assets such as treasury bonds and central bank bills, the People's Bank of China said in a statement.

The tool can greatly improve the ability of relevant institutions to obtain funds and invest in stock, said Tian Liang, an analyst at CITIC Securities.

The scale of the SFISF could be expanded depending on the development of the situation, according to the central bank.

The SFISF will promote medium and long-term capital investment and enhance the internal stability of the market, said Dong Ximiao, chief researcher at the Merchants Union Consumer Finance Company Limited.

Starting Thursday, applications from eligible securities, funds and insurance companies will be accepted.

As a long-term institutional arrangement, the SFISF is conducive to enhancing the resilience of China's capital market and curbing herd behavior and other pro-cyclical actions, thus helping maintain market stability, authoritative sources were quoted by Xinhua's financial newspaper, China Securities Journal, as saying.

The new tool does not indicate quantitative easing, but can boost the participation of non-bank institutions, enhance market liquidity, improve the transmission efficiency of monetary policy in the capital market, and promote the sound, steady development of the capital market, said Yu Lifeng, an analyst at Golden Credit Rating.

The SFISF is an asset swap and will not expand the scale of base currency issuance, said Xu Zhong, deputy head of the National Association of Financial Market Institutional Investors.