China's central bank launches re-lending facility and swap program to boost capital market development

China's central bank on Friday officially launched a re-lending facility and a swap program as two new monetary policy tools to boost the country's capital market development.

The People's Bank of China (PBC), the country's central bank, on Friday officially unveiled a special re-lending facility to guide banks to provide loans to qualified listed companies and their major shareholders for buybacks and increasing shareholdings to support a stable operation of the capital market.

The initial re-lending amount is 300 billion yuan ($42.16 billion), with an annual interest rate of 1.75 percent and a term of one year, with the possibility of extension depending on the situation, the PBC said on its official website.

The re-lending policy applies to publicly listed companies of various ownership types. A total of 21 national financial institutions are authorized to issue loans to support stock buybacks and shareholding increases by listed companies, as per policy regulations, the PBC said.

These 21 financial institutions can independently decide whether to grant loans, determine the loan requirements, and bear the associated risks. The loan interest rate is in principle capped at 2.25 percent. The funds from these loans must be used specifically for their intended purpose and managed in a closed loop, the PBC said.

The re-lending facility will be issued on a quarterly basis. Effective immediately, the 21 financial institutions can provide loans to eligible listed companies and their major shareholders for stock buybacks and shareholding increases. After issuing the loans, these institutions can apply for re-lending from the PBC in the first month of the following quarter. For qualified loans, the PBC will provide re-lending equal to 100 percent of the loan principal to the financial institutions, the PBC said.

The PBC also announced the official start of the operation of the Securities, Funds, and Insurance companies Swap Facility (SFISF) on Friday, another policy tool to support the healthy and stable development of the capital market.

The SFISF will allow eligible securities, funds, and insurance companies to use their assets including bonds, stock ETFs, and holdings in constituents of the CSI 300 Index as collateral in exchange. The funds obtained through this tool can only be directed toward the capital markets, specifically for investments in stocks, stock ETFs, and market making.

Currently, 20 securities and fund companies have been approved to participate in the swap facility operations, with the initial application amount exceeding 200 billion yuan, the PBC said.

The Shanghai Composite Index rose by 0.67 percent, the Shenzhen Component Index increased by 1.64 percent, and the ChiNext Index climbed by 3.29 percent as of the close of morning trading on Friday.