What Exactly Is the Purpose of the Securities-Fund-Insurance Company Swap Facility?

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

What does this mean? It means institutions short on funds to buy stocks can now "borrow" from the central bank! Funds acquired through this tool must be used exclusively for stock market investments. For example, a fund company holding CSI 300 stocks may face forced sell-offs due to continuous investor redemptions amid a market downturn. Selling these stocks further drives down the fund’s net asset value (NAV), triggering even more redemptions—a vicious cycle.

Now, the fund company can pledge some of its stock holdings as collateral to the central bank in exchange for highly liquid assets like government bonds. These assets can then be liquidated into cash, allowing the fund manager to meet redemption demands without selling off shares. The fund could even use the cash to increase its positions. This effectively breaks the vicious cycle of stock sell-offs.