PBoC’s new stock market stabilisation stimulus shows quick results

On 24 September, People’s Bank of China (PBoC) governor Pan Gongsheng announced a series of stimulus measures aimed at "supporting the stable development of stock markets”. The measures include larger-than-expected cuts in interest and reserve rates, alongside the introduction of new monetary tools. Specifically, the PBoC will provide RMB 300 billion ($43 billion) in designated refinancing for stock repurchases and shareholding increases, and RMB 500 billion ($ 71 billion) in swap facilities for securities firms, funds, and insurers. Both amounts are initial allocations, with the potential for expansion under certain market conditions.

Monetary measures to support the stock market introduced for the first time

Similar to the Federal Reserve's recent 50 basis points (bps) cut to the Fed funds rate— exceeding the widely anticipated 25 bps cut— many of the PBoC's stimulus measures were considered "unexpected." The most notable change in the PBoC’s monetary policy is its new focus on the equity market. Historically, the central bank has been primarily involved in debt markets, with limited direct influence on the equity market.

Given that China’s equity market has been sluggish for some time, the announcement of new monetary tools has injected a strong boost of confidence. On 25 September, the China Securities Index (CSI) 300 Index closed at 3,460.4, nearly 4% higher than the previous day, reflecting the swift positive impact on the capital markets. Retail investors are cheering this "clear act of market rescue" on social media, and leading financial institutions such as Morgan Stanley have suggested this could trigger a “tactical rebound for the A-shares market,” potentially positioning China to outperform other emerging markets.

Structural monetary instruments deployed to enhance market stability

The new refinancing tool for stock repurchases and shareholding increases functions as a structural monetary instrument. The PBoC provides refinancing to commercial banks at an interest rate of 1.75%. In turn, commercial banks offer loans to eligible listed companies and shareholders at approximately 2.25%, with funds exclusively designated for stock repurchases and shareholding increases. This tool serves as a leverage mechanism for better “market capitalisation management,” aligned with the goals of the China Security Regulatory Commission (CSRC).

The swap facilities allow securities firms, funds, and insurers to use assets such as bonds, stock exchange-traded funds (ETFs), or CSI 300 Index stocks as collateral to acquire more liquid assets like government bonds or central bank bills. This increases their liquidity, enabling more effective investment in the stock market.

Effectiveness of new tools will depend on broader economic fundamentals

These new tools are designed to provide additional liquidity to the equity market by increasing leverage among key players. The refinancing for stock repurchases and shareholding increases offers listed companies and major shareholders low-cost funding, incentivising them to stabilise their market capitalisation. Likewise, the swap facilities allow financial institutions to leverage their capital market assets as collateral to generate additional liquidity for reinvestment. The RMB 500 billion ($71 billion) in swap facilities could lead to significantly larger liquidity flows, depending on the financial institutions’ leverage ratios.

While concerns remain about the sustainability of these policies and the willingness of market participants to take on more leverage, the immediate goal is to stabilise and strengthen the capital market, as well as to manage capitalisation. These tools offer short-term liquidity support but long-term success will depend on broader economic fundamentals, especially in a leveraged environment. Continuous monitoring and potential adjustments based on China’s economic trajectory will be key to achieving the desired outcomes.