TMTPost -- Actions speak louder than words. Chinese shares rebounded Friday on adoption of the central bank’s new tools that will inject up to RMB 800 billion (US$112.38 billion) to prop up the capital market, along with strong indication of further stimuli including interest rate cuts.

Credit：Xinhua News Agency

The mainland China's SSE Composite Index closed up 2.9%, and the ChiNext index, which tracks stocks traded on the Nasdaq-style subsidiary of the Shenzhen Stock Exchange, surged nearly 8%, erasing their losses Thursday. The blue chip CSI 300 index of onshore stocks rose 3.6% Friday after a decline of 1.1% a day earlier. Hong Kong’s benchmark Hang Seng Index climbed 3.6%, paring loss of 1% Thursday. The Nasdaq Golden Dragon China Index, which tracks 65 China-exposed U.S.-listed companies, settled 3% higher after dropping 3.6% to its lowest close since September 25.

Earlier Friday, the People's Bank of China (PBOC) Friday officially launched a facility called Securities, Funds and Insurance companies Swap Facility, or SFISF, to allow  eligible securities firms, funds, insurance companies to exchange for high quality liquidity assets like treasury bonds from the central bank using various collateral assets such as bonds, equity exchange traded funds (ETFs) and holdings in constituents of CSI 300 index, which tracks the top 300 stocks traded on the Shanghai Stock Exchange and the Shenzhen Stock Exchange.

The PBOC last Thursday announced it has decided to set up introduced the SFISF with the initial scale of RMB500 billion, the first monetary policy tool created by China to support the capital market.  The central bank said in the statement it initially injected RMB500 billion for  and the scale of the new swap facility could be expanded if needed in the future.

So far, a total of 20 securities and funds companies have been approved to participate in the SFISF operation, and the first batch of application quota exceeding RMB200 billion, according to a statement released by the PBOC on Friday.

Friday saw the PBOC kicked off another facility that Pan Gongsheng, governor of the central bank pre-disclosed last month. The tool is a special re-lending facility to guide banks to provide loans to listed companies and their major shareholders for buybacks and increasing shareholdings. The initial re-lending scale is RMB 300 billion at an interest rate of 1.75% with a term of one year, can be rolled over if needed. The facility can be applied to various types of companies regardless of their ownership, according to the central bank.

The latest rollout of incremental stimulus measures reflects authorities’ firm determination to ensure economic stability, stabilize expectations, promote consumption, since the property and capital markets are among the economy’s biggest challenges and require targeted policies, explained Pan at the Annual Conference of Financial Street Forum 2024 on Friday. Pan said the two facilities to support the stable development of the capital market are entirely based on market-oriented principles, and swap facility is not direct financial support from central bank.

Pan clarified the new facility does not mean the PBOC directly provides financial support to the market, so it will not expand the central bank’s money supply. Central bank's provision of stock buyback and additional purchase re-loans has specific directional aims, and a fundamental bottom line is that loan funds must not unlawfully enter the stock market, Pan cautioned.

Pan stressed monetary policy framework will be further improved, with a focus on achieving a reasonable rise in prices as a key consideration. The central bank will focus more on the role of price-based regulatory tools such as interest rates.

Pan noted recent rate cuts and suggested more cuts could come within the year. The PBOC has lowered the reserve requirement ratio (RRR) by a half percentage points, or 50 basic points (BPs), and the interest rate of seven-day reverse repurchases by 20 BPs on September 27.T he standing lending facility (SLF) interest rates were also lowered by 20 BPs that day. Interest rate of medium-term lending facilities (MLF) with a maturity of of one year has been reduced by 0.3 percentage points, down from 2.3% to 2.0% on Septermber 25. The central bank is considering a cut of 0.25 to 0.5 percentage points in reserve requirement ratio at an appropriate time before the end of 2024, depending on market liquidity situations, Pan said.

China's major state-owned commercial banks announced Friday reductions in deposit interest rates. The one-year fixed-term deposit interest rate was cut by 25 basis points to 1.1%, according to the official deposit interest rates released by Industrial and Commercial Bank of China, Bank of China, China Construction Bank, Agricultural Bank of China and Bank of Communications. Pan added the loan prime rate (LPR), a market-based benchmark lending rate, is expected to be trimmed by 0.2 to 0.25 percentage points on October 21, next Monday.

Initiation of the PBOC's new facilities were announced right after the National Bureau of Statistics (NBS) released the Chinese economy expanded 4.6% year-over-year (YoY) in the third quarter, the least pace in six quarters. China aims to expand its GDP by around 5% YoY this year, a goal that Chinese authorities have recently called for concrete moves to achieve. “The economy will perform better in the fourth quarter given the new stimulus measures,” said Larry Hu, head of China economics at Macquarie Group Ltd.