(Yicai) Oct. 10 -- China's first monetary policy tool specifically aimed at supporting the stock market has been launched with an initial CNY500 billion (USD70.8 billion).

The People's Bank of China announced today the creation of the Securities, Funds and Insurance Companies Swap Facility, part of a big economic stimulus package unveiled last month. The new mechanism is intended to support the “healthy and stable development of the capital market,” the central bank said.

Eligible securities, funds, and insurance firms can use assets such as bonds, stock exchange-traded funds, and shares of CSI 300 index constituents as collateral to tap highly liquid assets such as treasury bonds or central bank bills through the facility, the PBOC said, adding that it has begun accepting applications.

The funds secured from the mechanism can only be invested in the stock market and its size can be expanded depending on how the situation develops, the bank added. It will facilitate share buybacks and fundraisers through stock sales, according to experts.

The new tool will not increase base money supply and does not belong to quantitative easing as it only involves swaps of different kinds of securities, the experts pointed out. Based on the Term Securities Lending Facility, a similar instrument the US Federal Reserve set up during the subprime mortgage crisis of 2008, swap tools can play a key role in steadying the financial market, they noted.

PBOC Governor Pan Gongsheng revealed on Sept. 24 that the central bank would soon set up the liquidity tool. The announcement came after a slide in Chinese mainland stocks this year, eroding investor confidence, which has  reversed since the government set out its biggest package of stimulus measures since the Covid-19 pandemic.

The facility has a maturity period of up to one year and allows for renewals upon expiry, according to people close to the PBOC. Its flexibility suggests the tool could play a major role in the future, they noted, adding that the bank will carry out operations via specific tier-one traders, with China Bond Insurance potentially being one.

Editors: Xu Wei, Martin Kadiev