In a bold move to support its struggling economy, China's central bank has introduced a substantial liquidity initiative, opening a $71bn “swap facility” aimed at enabling firms to purchase stocks. This announcement, made on October 10,  follows a series of measures intended to rejuvenate the economy, which has faced ongoing challenges since the lifting of Covid-19 restrictions, as reported by The Inquirer. 

The recent stimulus package, unveiled last month, included interest rate cuts and relaxed home-buying regulations, as authorities sought to rekindle growth amid persistent issues such as a property debt crisis and weak consumer spending. Following these announcements, investor sentiment briefly soared, with mainland and Hong Kong equities experiencing a notable rally. However, optimism took a hit earlier this week when a much-anticipated press conference concluded with only a reiteration of the government’s annual growth targets, leaving many disappointed with the lack of new initiatives.

Now, with the introduction of the swap facility, firms can leverage equities, bonds, and other assets as collateral for access to cash in the form of high-grade liquid assets, including treasury bonds and central bank bills. The People’s Bank of China (PBoC) has indicated that this program could be expanded in response to market conditions. Early market reactions were positive, with Shanghai shares climbing over one per cent and Hong Kong stocks rising by more than two per cent.

The PBoC's chief, Pan Gongsheng, previously stated that such measures would “significantly enhance” companies’ access to funds for stock purchases. This liquidity injection is seen as essential as China grapples with a myriad of economic hurdles, including a persistent crisis in the property sector, chronically low consumer spending, and high youth unemployment rates.

In conjunction with the swap facilities, the Chinese government has also implemented a range of fiscal adjustments, including interest rate reductions on one-year loans and adjustments to cash reserve requirements for banks. Major cities like Shanghai and Guangzhou have relaxed restrictions on home purchases to bolster the housing market, which remains a critical growth engine.

Despite these efforts, analysts caution that more direct state support is essential to stimulate consumption and meet the government’s growth target of around 5% for the year. As anticipation builds for a fiscal policy briefing from Finance Minister Lan Fo’an on October 12, traders are eager for a concrete action plan that could further boost economic sentiment.

As China navigates these turbulent waters, the effectiveness of its strategies will be closely monitored, with the PBoC playing a pivotal role in steering the economy towards recovery.