On September 24, 2024, Pan Gongsheng of the People's Bank of China (PBOC) stated that the PBOC had, for the first time, created a structural monetary policy tool to support the capital market. One of these tools is the Securities-Fund-Insurance Company Swap Facility, which allows eligible securities firms, fund companies, and insurance companies to use their own bonds, stock ETFs, or CSI 300 constituent stocks as collateral to exchange for highly liquid assets such as government bonds and central bank bills from the central bank. This policy will significantly enhance these institutions' ability to obtain funds and increase their stock holdings. Funds acquired through this tool can only be used for investing in the stock market. Pan Gongsheng revealed that the initial scale of the swap facility operation would be 500 billion yuan, with the potential for expansion in the future depending on circumstances.

What does this mean? It means that if institutions lack money to buy stocks, they can now borrow from the central bank! Funds obtained through this tool can only be used for investing in the stock market. For example, a fund company may hold CSI 300 constituent stocks, but due to a market downturn, continuous redemptions by fund investors force the company to sell its holdings. Selling these stocks leads to a decline in the fund's net asset value, which in turn prompts more investors to redeem their shares. This creates a vicious cycle.

Now, this fund company can pledge a portion of its stock holdings as collateral to the central bank in exchange for highly liquid assets such as government bonds or central bank bills. These assets can then be liquidated into cash. When investors seek redemptions, the fund manager will have spare cash to meet these demands without having to sell the underlying stocks. The fund company could even use the cash to increase its positions. In this way, the vicious cycle of stock sell-offs is broken.