China Unveils $71B 'Swap Facility' to Boost Markets

Last month, authorities unveiled various stimulus measures—including interest rate cuts and relaxed home-buying regulations—in response to ongoing economic challenges, such as a protracted property debt crisis and lackluster consumer spending.

The announcement of the swap facility sparked optimism in both mainland and Hong Kong equity markets, with traders hopeful that officials are finally addressing the persistent issues undermining economic growth. However, this enthusiasm waned earlier in the week when a widely anticipated press conference offered only a reiteration of the government's commitment to its annual growth targets without additional measures or clarifications on previous announcements.

The People's Bank of China (PBoC) detailed its plans to promote "healthy and stable capital market development" by making 500 billion yuan (approximately $70.6 billion) available for firms to leverage in stock purchases. Companies can use various assets, including equities and bonds, as collateral for high-quality liquid assets such as treasury bonds and central bank bills. The PBoC indicated that the program could be expanded based on market conditions.

Following the news, Shanghai stocks surged by over 1%, while Hong Kong’s market climbed more than 2%. This latest initiative follows a series of stimulus actions announced last month, which had previously ignited a remarkable 20% rally in stock markets.

PBoC Governor Pan Gongsheng previously stated that these measures would "significantly enhance" firms' capabilities to access funds for stock investments. Additionally, the central bank has lowered interest rates on one-year loans to financial institutions, reduced reserve requirements for banks, and worked to decrease mortgage rates.

China faces numerous challenges, including a lingering crisis in the property sector, persistently low consumer spending, high youth unemployment, and rising local government debt. To support the housing market—once a key economic driver—major cities like Shanghai, Guangzhou, and Shenzhen have relaxed restrictions on home purchases.

Analysts emphasize that more direct government intervention is necessary to stimulate consumer demand and achieve the official growth target of around 5% for the year. This week, top economic planner Zheng Shanjie expressed confidence in reaching that goal and emphasized the importance of maintaining stable, sustainable growth.

Heron Lim, an economist at Moody's Analytics, noted that while the PBoC's actions are crucial, they represent only one facet of the broader solution. "What is required now is a comprehensive fiscal support plan to boost sentiment and drive recovery," he said.

Traders are eagerly anticipating further developments this Saturday, when Finance Minister Lan Fo'an is scheduled to provide insights on fiscal policy and outline measures aimed at promoting high-quality economic growth.