China’s Monetary Stimulus. Aggregate and Structural Implications

The People’s Bank of China (PBOC) convened its 2025 work conference in Beijing from 3 to 4 January, signaling a commitment to maintaining a supportive policy stance in the new year following key steps in this direction in 2024. September 2024 marked the introduction of a distinctive monetary stimulus package in China with additional instruments added to the toolkit. The announced measures reflected not just an expansionary policy stance, but also the use of additional transmission channels through asset prices and forward guidance, as well as a greater focus on the capital markets. The package signaled a policy ambition to address both cyclical and structural challenges in the Chinese economy, though the long-term impacts remain to be assessed.

What is the monetary stimulus from 24 September 2024?

In the second half of 2024, the Chinese financial authorities rolled out a bundle of stimulus measures, including newly created monetary policy tools. On 24 September 2024, Pan Gongsheng (潘功胜), Governor of the People’s Bank of China (PBOC), joined by officials from the National Financial Regulatory Administration (NFRA) and the China Securities Regulatory Commission (CSRC), announced a package of monetary policy measures aimed at ‘providing financial support for high-quality economic development’. The announcement included rate cuts, targeted support for the property sector, and two new monetary policy tools designed to stabilize the financial market. While rate cuts and property sector support were expected given the post-COVID economic slump and faltering property market, the introduction of the two new facilities stood out.

Two new monetary policy instruments targeted at the stock market

1. Securities, Fund, and Insurance Swap Facility (SFISF):

This facility enables eligible non-bank financial institutions (NBFIs) to swap their holdings of bonds, exchange-traded funds (ETFs), and CSI 300 Index constituents for high-liquidity assets, such as government bonds and central bank bills with the PBOC. The liquidity obtained must be used ‘for stock and ETF investments or market-making activities’. By the end of January 2025, SFISF was conducted twice with RMB 50 billion in October 2024 and RMB 55 billion in January 2025, with potential future expansions up to RMB 1.5 trillion.

2. Central Bank Lending Facility for Share Buybacks and Shareholding Increases:

This facility enables banks to lend to listed companies and major shareholders exclusively for share buybacks and shareholding increases, backed by PBOC refinancing at 100% of the loan principal with an interest rate of 1.75%. It provides an initial RMB 300 billion, with potential expansions to RMB 900 billion. The facility is available to all types of enterprises, including state-owned, private, and mixed-ownership entities. By late January 2025, more than 300 listed companies have disclosed their participation via this facility with more than RMB 60 billion and an average interest rate of 2%.

Broadening the monetary policy toolkit  

The measures outlined above mark a key development in the policy approach of China’s top financial authorities, with further monetary policy transmission channels in play and a broader range of the financial sector now engaged. While banks remain central, the explicit targeting of NBFIs and the capital market in PBOC operations is unprecedented. Previously, standing facilities focused on the banking sector. Similarly, only three NBFIs are eligible primary dealers in the PBOC’s open market operations, while most NBFIs can only access these markets indirectly through the interbank system. In addition, the inclusion of equities as collateral in PBOC operations marks a significant expansion of its liquidity provision. Furthermore, it is noteworthy that the monetary authorities were not only the first to communicate these measures but also explicitly signaled their likely continuation—an unusual and impactful move.

The transformative implications of the new facilities are long-term and structural.

1. Expansion of Monetary Policy Transmission Channels: the measures mentioned above leverage asset price channels and related forward guidance to instill long-term confidence among households and firms[1]. By engaging capital market participants directly, particularly investors in the stock market, these tools are meant to raise asset prices and thereby stimulate both consumption and investment. Firstly, for households, rising asset values create a “wealth effect,” encouraging increased spending. Secondly, for firms, higher asset valuations improve access to capital by enhancing the value of collateral, and thus facilitate investment. For instance, higher stock valuations improve a firm’s ability to secure borrowing through equity pledge financing, where shares are used as collateral for loans. This mechanism, often referred to as the balance sheet or collateral channel, leverages asset price increases to expand borrowing capacity. Forward guidance, by signaling the future direction of monetary policy, strengthens market expectations and complements these effects.
2. Greater focus on the stock market and NBFIs: dedicated liquidity channels for NBFIs and the eligibility of equities underscore the growing policy focus on direct financing for the real economy. To this day, China’s financial system has been dominated by bank financing, in particular through large state-owned commercial banks. By the end of 2024, RMB loans totaled 253 trillion, accounting for 60% of the stock of Aggregate Financing to the Real Economy (AFRE), while corporate bonds made up 8% and domestic equity financing by non-financial enterprises 3%. In terms of institutional shares, banks held 90% of total financial assets of all financial institutions as of Q3 2024, compared to just 3% for securities institutions and 7% for insurance. By putting a spotlight on the stock market and NBFIs, the PBOC appears to also pursue the objective of further developing the country’s capital markets and thus directing financing of the real economy.

Aggregate and structural implications for the Chinese economy

The monetary policies outlined above carry both aggregate and structural implications for the Chinese economy.

On the aggregate side, the CSI 300 Index initially hiked up by more than 30% and is currently still up by nearly 20% compared to its level prior to the new stimulus measures. While an initial rise in asset prices may instill some near-term confidence, experts stress the need for complementary fiscal stimulus and institutional reforms to sustain a long-term wealth effect and drive investment.

As for potential structural shifts, domestic equity financing made up only 1% of the annual AFRE flow in 2024, compared to 32% of AFRE flows from government bonds. Given the volatility since the September 2024 announcement, and doubled turnover notwithstanding, it remains uncertain if the stock market will experience a sustained slow revival and serve as a stronger direct financing channel for the real economy.

Finally, it will be important to watch the implications of the most recent measures on the PBOC’s other structural instruments. As rates are cut and further liquidity measures are introduced, the broad range of the PBOC’s targeted refinancing operations, such as preferential lending schemes for green and tech enterprises (e.g., the Carbon Emission Reduction Facility), may face a decline in attractiveness. If the PBOC wants to offset that effect, it will most probably need to adjust the terms of its structural instruments accordingly. The areas the PBOC outlined in October to enhance its structural monetary policy tools for green finance point to possible trajectories in this context.

[1] Note: A detailed discussion with academic research on the monetary policy transmission channels in China can be found in subchapter 4 in chapter 4 ‘China’s Interest Rate Liberalization’ by Jun MA and Xiaobei HE and subchapter 5 in chapter 2 ‘Monetary Policy Framework and Transmission Mechanisms’ by Yiping HUANG, Tingting GE, Chu WANG in The Handbook of China’s Financial System edited by Marlene Amstad, Guofeng SUN and Wei XIONG, Princeton University Press. https://doi.org/10.2307/j.ctv11vcdpc

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