SFISF Policy Tools to Ensure Stable Capital Market Growth
The implementation of the Securities, Funds, and Insurance Companies Swap Facility (hereinafter referred to as "SFISF") monetary policy tool will significantly enhance the institutions' ability to obtain funds and increase their stock holdings.
On October 10, 2024, the central bank issued a statement announcing that the People's Bank of China has decided to create the "Securities, Funds, and Insurance Companies Swap Facility" to support eligible securities, funds, and insurance companies to swap bonds, stock ETFs, and constituents of the Shanghai-Shenzhen 300 index for high-grade liquid assets such as government bonds and central bank bills from the People's Bank of China.
Liang Si, a researcher at the Bank of China Research Institute, told reporters, "The SFISF facilitates these institutions' access to financing, thereby enhancing their liquidity levels and better playing a role in stabilizing the market."
"Swap for Swap" Operation
On September 24, at a press conference held by the State Council Information Office, the central bank governor Pan Gongsheng announced that two structural monetary policy tools, the Securities, Funds, and Insurance Companies Swap Facility and stock repurchase and increase in re-lending, would be created in the near future to support the stable development of the capital market.
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The central bank recently launched the first phase of 500 billion yuan SFISF, marking the official implementation of this monetary policy tool.
In the industry's view, this is an important structural monetary policy tool created to implement the decisions of the Third Plenary Session of the 20th Central Committee of the Party on "perfecting the capital market functions that coordinate investment and financing, and establishing a long-term mechanism to enhance the intrinsic stability of the capital market." It is also the first time the central bank has innovated a structural monetary policy tool to support the capital market.
Yu Lifeng, Executive Director of the Development Department of Orient Jincheng, stated that the swap facility operates through a "swap for swap" method, which can provide liquidity support to the capital market without increasing the base money supply.
From the operational principle, SFISF is similar to the U.S. Term Securities Lending Facility (TSLF), which enhances the financing and investment capabilities of relevant institutions through the "swap for swap" form, achieving liquidity support.
Reporters learned that the U.S. introduced the Term Securities Lending Facility (TSLF) during the 2008 financial crisis, allowing primary dealers to swap low-credit-rated securities for government bond assets. This timely expanded the liquidity channels for financial institutions, effectively stabilized market fluctuations, and boosted investor confidence.Pan Gongsheng stated at the press conference held by the State Council Information Office that there is a significant difference in credit rating and liquidity between government bonds, central bank bills, and other assets held by market institutions. Many institutions have assets, but under current circumstances, their liquidity is relatively poor. By swapping with the central bank, they can obtain higher quality and more liquid assets, which will greatly enhance the capital acquisition capabilities and stock increase capabilities of the relevant institutions.
Regarding government bonds, Huatai Securities indicated that the central bank currently holds a total of 2.03 trillion yuan in government bonds, which can be understood as the "ammunition" for the central bank's swap convenience tool. Subsequently, the central bank can also increase the scale through operations such as buying and selling government bonds and borrowing government bonds.
Dong Ximiao, Chief Researcher at China United and a part-time researcher at the Institute of Finance at Fudan University, also said in an interview with reporters that through swap convenience operations, non-bank institutions can replace their less liquid assets with more liquid assets such as government bonds and central bank bills. This facilitates repurchase or sale financing in the market, thereby more efficiently injecting more liquidity into the capital market and promoting the long-term healthy and sustainable development of the capital market.
Improving Capital Stability
The interviewed institutions believe that the introduction of swap convenience is conducive to improving the stability of the capital market.
Yu Lifeng believes that the ability of non-bank institutions to obtain funds in the case of a weak market and poor liquidity will be improved, which can lead to an increase in undervalued stocks, thereby stabilizing market sentiment, improving market liquidity, and boosting market confidence.
After the central bank announced the introduction of a series of policy tools including swap convenience on September 24, the A-share market obviously stabilized and rebounded.
Public statistics show that in the five trading days before the National Day holiday (from September 24 to 30), the A-share market showed a continuous upward trend, with the Shanghai Composite Index rising from 2748.92 points to 3336.5 points, a cumulative increase of 21.38%, the Shenzhen Component Index with a cumulative increase of 30.26%, and the ChiNext Index with a cumulative increase of 42.12%.
Liang Si believes that the introduction of the swap convenience tool further expands the channels of liquidity sources for securities, funds, and other main financial institutions in the capital market. It will bring a strong stabilizing effect to promote the stable operation of the market and boost investor confidence, which is conducive to improving the microstructure of market liquidity and risk preference, and promoting the stable development of the capital market.
The market generally believes that the swap convenience tool will be more favored when the stock market is weak, which helps securities, funds, and insurance companies to obtain funds in a timely manner for adjusting positions and increasing holdings, thereby promoting market conditions to stabilize and rebound.On September 26th, the Central Political Bureau meeting emphasized the need to strive to boost the capital market, vigorously guide medium and long-term funds into the market, and unblock the points of entry for social security, insurance, financial management, and other funds. On the same day, the Central Financial Office and the China Securities Regulatory Commission jointly issued the "Guiding Opinions on Promoting the Entry of Medium and Long-term Funds into the Market," which pointed out the need to focus on improving the supporting policies and systems for various types of medium and long-term funds to enter the market.
Dong Ximiao stated that the relevant departments' announcement to promote the entry of medium and long-term funds into the market will continuously bring "fresh water" to the capital market, promote a significant increase in the scale and proportion of medium and long-term fund investments, and make the investor structure of the capital market more rational, enhancing the long-term nature of investment behavior and the inherent stability of the market.
According to the statistical data of the China Securities Regulatory Commission, by the end of August this year, the total holdings of A-shares' circulating market value by professional institutional investors such as equity-type public funds, insurance funds, and various pension funds approached 15 trillion yuan, more than doubling from the beginning of 2019, and the proportion of A-shares' circulating market value increased from 17% to 22.2%.
In Dong Ximiao's view, promoting the entry of medium and long-term funds into the market helps to continuously boost investor confidence, steadily increase investor returns, better play the leading role of medium and long-term funds, and promote the concept of medium and long-term value investment into people's hearts. "A series of recent favorable policies and measures for the capital market have been introduced to consolidate the foundation for the sustained stability and improvement of the capital market, providing ample momentum for the market's healthy and upward development."
Dong Ximiao also warned: "For investors, it is necessary to reasonably allocate assets based on their own investment experience, investment ability, and risk preference, and not blindly chase rises and kills falls."