The capital market plays a crucial role in the effective allocation of financial resources. It is a vital component that significantly bolsters confidence within domestic and foreign markets. The ongoing initiatives by a central bank are part of a broader exploration aimed at enhancing the transmission of monetary policy and stabilizing the financial system. Such measures are critically important, particularly as they help to establish a stable equilibrium within the capital market that can adapt to changing economic conditions.

One of the primary objectives of recent policies introduced by the People's Bank of China was to enhance market liquidity. In September 2024, the central bank, in coordination with financial regulatory bodies, unveiled a package of incremental support measures. These measures included two innovative tools specifically designed to support the capital market: the Swap Convenience and a refinancing program for stock buybacks.

The Swap Convenience permits eligible securities, funds, and insurance companies to exchange stocks, stock ETFs, and bonds as collateral for high liquidity assets, such as government bonds and central bank bills, thereby facilitating easier access to liquidity from the central bank for non-bank institutions. In addition, the stock buyback refinancing initiative encourages banks to extend loans to qualified public companies and their major shareholders, ensuring that these funds are used exclusively for stock buyback operations.

Industry insiders have noted that these newly implemented tools have significantly augmented liquidity in the capital markets, bolstered investor confidence, and reinforced the inherent stability of the market, ultimately driving its long-term healthy growth. Early results indicate that these measures are making a notable impact. As of January 2025, the Swap Convenience had been executed twice, with a total of 105 billion yuan engaged, allowing securities firms to ramp up their own stock investments significantly. Furthermore, by the end of 2024, Chinese listed companies had collectively disclosed intentions to apply for stock buyback loans amounting to nearly 60 billion yuan. An impressive projection also indicated that the total amount of disclosed buyback plans and shares intended for repurchase by major shareholders reached 300 billion yuan, marking an unprecedented high.

The two instruments also played a stabilizing role during volatile periods. Professor Tian Lihui from Nankai University emphasizes that during a sluggish market performance—especially notable in the third quarter of 2023—the unveiling of these tools led to a swift and significant recovery in the A-share market. Taking the reigns of market sentiment back from bearish outlooks, these initiatives have prompted investors to regain their footing.

These support tools inherently possess counter-cyclical attributes. They are expected to see increased usage during periods of stock underperformance, where there is a strong buying inclination from industry participants, listed companies, and major shareholders. Conversely, as share prices rise and liquidity normalizes, this inclination will naturally decline, leading to reduced tool usage. This mechanism is expected to offer corrective feedback to the capital market’s overreaction and help stabilize market expectations, ultimately supporting the sustained health of the capital market.

From a policy design and operational perspective, the two newly established tools follow principles of market orientation and the rule of law. The decision to use these mechanisms, as well as the extent of their usage, primarily relies on the willingness of financial institutions and public companies to engage with them.

In practice, the Swap Convenience operates on a competitive bidding basis, allowing participating organizations to voluntarily tender based on market conditions. Conversely, the buyback refinancing initiative incentivizes banks through preferential interest rates, allowing them the autonomy to determine loan issuance terms while adhering to prudent risk management practices.

As of October 17, 2024, qualifying listed companies and major shareholders were permitted to apply for loans from 21 national financial institutions, including state-owned commercial banks and policy banks. These loans are specifically intended for stock repurchases and shareholding increases with the financial institutions operating under market-oriented principles.

The phenomenon of stock buybacks is not exclusive to China. Between 2009 and 2019, U.S. listed companies ramped up their stock repurchases significantly, driven largely by a low-interest-rate environment that facilitated corporate debt financing. Although China's buyback refinancing segment is in its infancy, the targeted tools created by the central bank are expected to foster quicker market adaptation while satisfying listed companies' capital requirements.

Wen Bin, chief economist at China Minsheng Bank, elaborates that the central bank's introduction of these two tools was motivated by a desire for macro-prudential management. The primary aim of macro-prudential policies is to mitigate systemic financial risks and maintain overall financial system stability. By focusing on broader economic factors and potential contagion risks, efforts to control overreactions within the financial system and smooth out cyclic fluctuations remain a central priority.

The capital market serves as both a barometer of investor confidence and a vital mechanism for resource allocation and risk management. Wen asserts that the newly introduced tools can exert a counter-cyclical effect during downturns, guiding major stakeholders and industry players towards stock buybacks and increasing shareholdings when necessary. This intervention aids in stabilizing stock prices and curbing herd behavior in the markets, ultimately enhancing inherent market stability, which aligns closely with macro-prudential management goals.

Long-term stability and prosperity within the capital markets require a balanced approach toward investment and financing functionalities. Historically, China's capital market has leaned towards a ‘heavy financing, light return’ paradigm, making investors highly reliant on capital gains achieved in the secondary market. This has often resulted in considerable fluctuations. Industry experts believe that while the two newly implemented tools provide essential support and hedging functions, sustainable market growth relies on empowering market forces, constructing robust regulatory frameworks, and balancing the dual roles of investment and financing.

Listed companies that actively manage their market capitalization can send strong signals to investors regarding their confidence in both the company and the industry’s development prospects. On November 15, 2024, new measures were proposed to guide more listed companies in recognizing their investment value, hence committing to improving operational efficiency and profitability based on quality considerations. This includes leveraging mechanisms like pro-rata stock buybacks, equity incentives, cash dividends, and thorough investor relations management, fostering a more accurate reflection of the companies' quality and investment value.

It is crucial to maximize the role of listed companies in managing their market capitalization alongside the importance of securities and fund companies in maintaining market stability. Senior researcher Pang Ming at the National Financial and Development Laboratory notes that regulatory bodies have recently rolled out stringent measures to support the healthy development of capital markets. Concurrently, listed companies and financial institutions stand to gain significantly from a stable share price and robust operational performance. This necessitates taking proactive steps to manage market capitalization effectively, thus underpinning market stability and orderly trading.

Ultimately, the initial success seen from the two support tools indicates a promising trajectory. However, as we look ahead, there will be ongoing efforts to refine the design and functionality of these instruments, ensuring they more effectively facilitate the high-quality development of capital markets. The People's Bank of China plans to work in tandem with relevant departments to guide financial institutions in delivering comprehensive financial services for listed companies and their key shareholders. This includes encouraging insurance institutions to engage with the Swap Convenience and continuously enhancing related policies to bolster the practical application of these mechanisms, which collectively serve to stabilize financial markets.

As the economy continues to evolve and the financial markets deepen, the role of the capital market in resource allocation, risk management, and economic stability becomes increasingly vital. The central bank's establishment of support tools for the capital market underscores the significance of these markets within the national economy, aiming to rationally allocate liquidity and guide market resources effectively toward sustained healthy growth in the capital markets.