A Chinese policy think tank has proposed the issuance of 2 trillion yuan ($280 billion) in special treasury bonds to establish a stock market stabilization fund aimed at supporting the country’s financial markets. This recommendation, made by the Institute of Finance & Banking under the Chinese Academy of Social Sciences (CASS), reflects growing concerns about the volatility in China’s stock market and the need for more long-term stability measures.
Policy Proposal in Response to Market Volatility
The recent proposal comes amid a backdrop of fluctuating investor confidence in the Chinese stock market. The 21st Century Business Herald reported that the fund would focus on buying and selling blue-chip stocks and exchange-traded funds (ETFs), aiming to inject stability into the market. The goal would be to manage the sharp price swings that have dominated the market in recent months.
China’s stock market has seen rapid gains, particularly in blue-chip stocks, with an approximate 24% rise over the past month due to recent policy stimulus. However, that initial optimism has been replaced by caution, signaling the need for stronger measures to maintain long-term stability. The proposed fund is part of a broader quarterly economic report by CASS, China’s leading academic institution in policy and economics.
A Step Toward Greater Financial Stability
The proposal for a stabilization fund is part of a larger conversation about how China can enhance its financial resilience. Pan Gongsheng, the governor of China’s central bank, confirmed last month that the idea of such a fund was under consideration. The central bank is already studying how this mechanism could work, with the potential for significant market intervention during times of financial stress.
The fund would operate as a market backstop, with the ability to purchase and sell key market assets during periods of volatility. This action could help offset sharp declines or prevent bubbles from forming by adding liquidity to the market when necessary. The think tank also suggested further expanding the involvement of long-term capital sources such as insurance companies and the national pension fund.
Institutional Investors as Key Players
Institutional investors, including insurance companies, pension funds, and asset management firms, are seen as critical players in ensuring market stability. In the same proposal, CASS recommended raising the ceiling on stock investments by these institutions. This would allow for more substantial investments in China’s stock market, providing a more stable and long-term source of funding to counteract the speculative activities of retail investors.
China has already introduced several policies to encourage institutional investment. These include easier access to liquidity for institutional investors and incentives for companies to engage in share buybacks. The idea is to shift the balance of the market from being dominated by short-term retail trading to a more structured and steady flow of institutional capital.
Recent Measures Boosting Liquidity
In line with these objectives, China’s central bank recently announced two major funding schemes, which will pump up to 800 billion yuan into the stock market. These measures allow brokerages, insurers, and asset managers easier access to liquidity for stock purchases, while listed companies and their major shareholders can borrow from the People’s Bank of China (PBOC) at lower interest rates for share buybacks.
These liquidity facilities are part of a larger effort by the Chinese government to support its financial markets amid concerns about economic growth. While China reported a 4.6% GDP growth in the third quarter of 2024, this was the slowest quarterly growth in over a year. Structural challenges, particularly in the property market and declining consumer demand, have put pressure on the broader economy.
A Coordinated Push for Economic Stability
The proposed stabilization fund could also play a role in addressing some of these broader economic challenges. By supporting blue-chip stocks and ETFs, the fund would provide a mechanism to shore up investor confidence, which has been shaky in recent months. Additionally, encouraging long-term institutional investments would help absorb some of the market volatility caused by short-term traders.
The report by the Institute of Finance & Banking underscores the importance of improving coordination between financial institutions and the central bank. By ensuring there is a seamless link between the money markets and capital markets, the PBOC can provide low-cost liquidity to the stock market when necessary, helping to smooth over market fluctuations.
The Road Ahead for China’s Stock Market
The proposal to establish a stock market stabilization fund is just one part of a broader strategy to bolster China’s financial system. While the details are still under discussion, the initiative highlights the government’s commitment to addressing volatility and ensuring that the stock market remains a pillar of economic growth.
For now, the focus will remain on how these proposals will be implemented. With Pan Gongsheng indicating that studies are already underway, it’s possible that we could see concrete actions in the near future. Additionally, China’s move to encourage more institutional investment reflects a broader push to reform its financial markets and reduce dependence on short-term retail traders.
The coming months will likely see further developments as Beijing continues to balance its efforts to stimulate growth with maintaining financial stability.
