China has announced it will allow institutional investors to use central bank financing to make stock purchases.
The Chinese government is now looking at creating a market stabilization fund starting with an initial pool of 800 billion yuan – $113 billion – to be injected into equities markets, Bloomberg reports.
Governor Pan Gongsheng said Beijing will start with a 500 billion yuan swap facility and a 300 billion yuan re-lending facility, but that another 500 billion yuan ($71.31 billion) may be added in phases.
Since the news came out, the Hang Seng Index (HSI), which is composed of 82 blue chip companies in China and Hong Kong, has rallied 17.4%.
HSI has now erased over 13 months of losses in just over two days.
The CSI 300, which is comprised of China’s 300 biggest companies, is up 12.84% on since the news was released.
Says Linda Lam, head of equity advisory for North Asia at Union Bancaire Privee in Hong Kong,
“What surprised the market is the clear direction and funding from the PBOC in being a firm liquidity resort to prop up the stock market. In the near term, Chinese capital markets should enjoy a sweet liquidity honeymoon period, while China is buying time to fix more deep-seated growth problems.”
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