"2 Innovative Tools to Accelerate A-Share Market, Attracting Billions in New Funds"

• News
• 2024-06-25

The "9·24" package of incremental policies is accelerating its implementation. Recently, two innovative monetary policy tools with a cumulative initial quota of 800 billion yuan—swap facility and stock repurchase and increase in holdings re-lending—have been progressing rapidly, capturing market attention.

Since the official launch of the swap facility on October 18th, institutions have quickly advanced related matters, with 50 billion yuan of swap facility operations already in place. Among them, CICC and Guotai Junan have respectively completed the first central bank bill swap transaction and the first government bond swap transaction.

On the 23rd, Guotai Junan completed the first batch of government bond pledge repurchase transactions in the entire market under the "Securities, Fund, Insurance Company Swap Facility (SFISF)", with the pledged bonds being government bonds borrowed through the swap facility operations.

Since the stock repurchase and increase in holdings re-lending tool was implemented five days ago, there has been continuous progress. Currently, about 30 listed companies have participated.

Tian Lihui, Dean of the Institute of Financial Development at Nankai University, believes that the introduction of these two tools demonstrates the regulatory authorities' emphasis on the stability of the capital market. They aim to promote the long-term healthy development of the market by providing liquidity support and incentive measures. At the same time, they also emphasize risk control and the special use of funds to prevent misuse of funds and market fluctuations.

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The two innovative monetary policy tools are accelerating their progress.

After the implementation of the two innovative monetary policy tools, all parties in the market have accelerated their participation and advanced related matters.

On the 18th, the People's Bank of China announced the official launch of the SFISF, with the initial operation scale of the swap facility being 500 billion yuan. The central bank will carry out operations in batches according to the needs of participating institutions. The first batch of approved securities and fund companies to participate includes 20 companies, with the first batch of application quotas exceeding 200 billion yuan.

Subsequently, institutions quickly responded and actively promoted the implementation of SFISF business. Starting this Monday (21st), CICC and Guotai Junan frequently reported new progress.

First, on the 21st, CICC officially announced the completion of the first pledge repurchase transaction under the swap facility, with the pledged bonds being the first phase of the 2024 swap facility central bank bills; Guotai Junan signed the "Bond Lending Agreement" with the China Bond Credit Enhancement Company, and completed the pledge operation procedures related to the first transaction on the 21st, as well as the pre-transaction related supporting work.On the 22nd, First Financial Daily learned that on the same day, Guotai Junan completed the first swap convenience under the whole market's first national debt swap-in transaction. CICC also bought stocks for the first time under the SFISF on the same day. It is understood that the first batch of pledged assets submitted by Guotai Junan for swap convenience is a basket of stock portfolios, and subsequently, the funds obtained from the swap convenience business will be used to further increase holdings of stocks and stock ETFs.

On the 23rd, Guotai Junan completed the first batch of national debt pledge repurchase transactions under the whole market of SFISF, with the pledged bonds being the national debts borrowed from the swap convenience operation.

In addition, other first batch institutions are also preparing for swap convenience business-related matters. A securities company person told reporters that the internal process before the swap is still underway, preparing for assets that meet the standards. Another person in charge of a securities company said that the securities company where he is located has already made a related application, but the funds have not been approved yet.

Shenwan Hongyuan Securities stated that the company will strictly abide by the relevant regulations and requirements of the central bank and the China Securities Regulatory Commission, and carry out business within the approved limit of 10 billion yuan.

At the same time when the swap convenience tool is rapidly advancing, after the stock repurchase and increase in re-lending tool is implemented, all parties in the market also quickly participate. The first batch of stock repurchase and increase in re-lending is 30 billion yuan, with an annual interest rate of 1.75% and a term of one year, which can be extended as needed.

On the evening of the 20th, the list of the first batch of 23 A-share listed companies participating in the repurchase and increase in re-lending gradually came out, involving China Petrochemical, Sunshine Power, China Merchants Shekou, etc., with a total fund amount exceeding 10 billion yuan. On the evening of the 22nd, 6 new listed companies were added, among which 5 are private enterprises.

Non-bank institutions increase financing to increase equity investment

The operational details of the swap convenience tool are also an important focus of the market.

On the 18th, the central bank and the China Securities Regulatory Commission jointly issued a notice to clarify the business process, operational elements, rights and obligations of both parties involved in the swap convenience operation.

"Swap convenience operations involve swaps, financing, investments, and other links." A person in charge of an institution told reporters that first, institutions pledge securities to swap national debts or central bank bills from the central bank, then use the swapped national debts or central bank bills for repurchase financing in the interbank market, and then use the funds raised to carry out proprietary and market-making operations.He specifically introduced the operational process, stating that the central bank determines the swap rate and winning results for the swap convenience business operations through open bidding. Subsequently, through a specific primary dealer in open market operations, China Bond Credit Enhancement Company, it exchanges government bonds or central bank bills for the winning securities, funds, and insurance companies through a bond lending method. Financial institutions should provide eligible and sufficient collateral to China Bond Credit Enhancement Company and complete the transaction within 10 working days after winning the bid. The obtained government bonds or central bank bills can only be used for financing through repurchase in the interbank market, and the funds obtained from the repurchase can only be used for investment in the capital market, limited to investment in stocks, stock trading funds, and market-making.

According to the central bank's announcement on the 21st, the first operation amount of the swap convenience was 50 billion yuan, using a bid rate method, with 20 institutions participating in the bidding. The highest bid rate was 50BP (basis points), the lowest bid rate was 10BP, and the winning bid rate was 20BP.

According to a research report by Guojin Securities, the available collateral includes bonds, stock ETFs, constituents of the CSI 300, and public mutual REITs, etc.; the swap term is 1 year, which can be extended as appropriate; the collateral ratio is not higher than 90%, and the replenishment line is not lower than 75%. The collateral ratio is set in different tiers according to the risk characteristics of the collateral.

Relevant documents obtained from the industry by the reporter show that securities companies participating in the investment of financing funds related to swap convenience should follow the principle of "special funds for special purposes, closed management", carry out proprietary investments and market-making transactions through dedicated accounts filed with the stock exchange, and ensure that the direction of fund investment complies with policy requirements. Relevant financing funds can be partially used to hedge market risks in the direction of swap convenience investment, and in principle, should not exceed 10% of the scale of financing funds.

In addition, the details have made targeted adjustments to the calculation of risk control indicators for securities held by securities companies through SFISF: the exchanged government bonds or central bank bills are not included in the "non-equity proprietary / net capital" indicator, and the exchanged stocks are not included in the "equity proprietary / net capital". The pledged assets are calculated according to the current proprietary positions for various risk control indicators, and there is no need to adjust to "frozen or pledged". The government bonds or central bank bills exchanged and the equity assets held after repurchase financing are not included in the on-balance-sheet assets, and the market risk and required stable funds are calculated at half.

Guojin Securities non-bank researcher Hu Jiang believes that SFISF is beneficial for securities companies to add leverage to equity proprietary operations, and the direction of adding leverage may mainly be value blue chips and high dividend stocks.

He specifically analyzed that, first, the cost of adding leverage funds is low, including the swap rate + repurchase rate, which may be between 1.9% and 2.3%; secondly, the targeted adjustment of risk control indicators on the one hand reduces the pressure of SFISF on the risk control indicators of securities companies, and on the other hand, it also opens up the space for adding leverage to equity proprietary operations; again, due to the low hedging ratio, and allowing investment to be included in other equity instruments, securities companies may tend to adopt a high dividend strategy, to reduce the impact of market risks while obtaining relatively stable returns.

It is expected to bring hundreds of billions of incremental funds.

In the industry's view, the two innovative monetary policy tools are important measures by the regulatory authorities to support the stable development of the stock market, contribute incremental funds to improve market liquidity, and boost investor confidence.

Looking at the series of monetary policy tools introduced by the Federal Reserve and the European Central Bank, there are similarities between China's SFISF and the Term Securities Lending Facility (TSLF) created by the Federal Reserve, mainly in that both have a "swap for swap" link that does not involve large-scale base money issuance and will not directly affect the money supply."The introduction of the swap facility is an attempt and exploration by monetary policy to support the capital market, which can greatly enhance the financing capacity of non-bank institutions and continuously bring incremental funds to the stock market." Huaxin Securities believes that the swap facility helps institutional investors play an active role in maintaining the stable operation of the capital market. On the one hand, the tool design has counter-cyclical adjustment characteristics. When the stock market is oversold, financial institutions have a strong willingness to buy, and the tool usage is large; when the stock market improves, the tool usage decreases. On the other hand, when facing redemption pressure from investors, financial institutions can finance by exchanging coupon mortgages instead of selling stocks at low prices, playing an active role in smoothing the market and stabilizing expectations.

Guolian Securities analysis states that the SFISF stipulates that primary dealers can only invest the obtained funds in the stock market, so it is expected that this tool may boost stock market sentiment, but the duration and support amplitude still need continuous observation.

Regarding the impact of the stock repurchase and increase in loans on the market, Tian Lihui said that the policy encourages listed companies and their major shareholders to repurchase and increase their holdings by providing loan support, thereby optimizing the company's capital structure, improving earnings per share and stock attractiveness, and improving the financing capacity and financial indicators of listed companies. This helps to boost market confidence and enhance investors' investment confidence in listed companies, stabilizing and enhancing company value.

"With the implementation of the two major tools, the characteristics of the policy's efficiency, practicality, targeted, strong, and predictable will gradually be recognized and accepted by the market, and it is expected to fundamentally boost market confidence and stabilize market expectations." Liu Jiawei, the chief analyst of non-bank institutions at Dongxing Securities, said.

CITIC Construction Investment also believes that the significance of the two tools is to improve the monetary policy toolkit, and the central bank has more liquidity influence channels for the stock market and non-bank financial institutions. The current purpose of the central bank using these two tools is to care for market liquidity and boost market confidence.

In terms of the securities industry, Liu Jiawei believes that the improvement of the capital market environment is conducive to the improvement of industry performance and valuation, and more reforms and business innovations are expected to broaden the business structure of securities firms in the future.