TMTPost -- One of China’s top investment banks taped into a milestone swap facility that the country’s central bank developed to boost the capital market.
Credit：Xinhua News Agency
State-backed China International Capital Corporation (CICC) announced Tuesday it has completed its first transaction in the stock market through the Securities, Funds and Insurance companies Swap Facility (SFISF), without details like the deal size. The Chinese investment bank said it will further increase its holdings of stocks with the funds obtained under the SFISF scheme.
CICC’s move came as the People's Bank of China (PBOC) said late Monday it has conducted the first operation of the SFISF, with the scale of RMB500 billion (about US$7.04 billion). The PBOC will continue to conduct facility operations in batches, as necessary, and will expand the size of the facility based on the actual situation after the initial RMB500 billion quota is achieved, China Daily cited informed sources.
Once the cumulative operation amount hits RMB500 billion, the central bank is expected to carry out further SFISF operations at a proper time and size, based on market trends and demand from financial institutions, according to the sources. The PBOC was said to swap out treasury bonds to meet the demand from financial institutions in the first SFISF operation, with related operations still underway.
SFISF is the first monetary policy tool created by China to support the capital market. It allows 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 People's Bank of China (PBOC) last Friday kicked off the SFISF with the initial scale of RMB500 billion. The scale of the new swap facility could be expanded if needed in the future, The central bank said earlier this month. A total of 20 securities and funds companies including CICC and CITIC Securities, China Asset Management Co 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.
The PBOC also launched last Friday 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.
More than 20 Chinese listed companies, including China Petroleum and Chemical Corp and China Merchants Port Group, have announced plans to tap special central bank lending for share buybacks and purchases in the re-lending scheme.
For securities firms, SFISF has its pros and cons: on the one hand, the cost of swap and repurchase may increase earnings/book value volatility, and on the other hand, the return on equity (ROE) will increase if positive returns can be generated, JP Morgan Chase pointed out in a note earlier this week. In terms of the flow trend generated under the SFISF, JP Morgan expected most of securities firms will more likely to take advantage of the tool to invest in high-dividend large cap shares, and most of their positions will be recorded as financial assets measured at fair value through other comprehensive income, or FVOCI, in accounting to reduce potential profit and loss fluctuations.
