Recently, the People's Bank of China (PBOC) announced the creation of the Securities, Funds, and Insurance companies Swap Facility (SFISF) to support eligible securities, fund, and insurance companies in exchanging high-quality liquid assets such as government bonds and central bank bills for collateral assets like bonds, stock ETFs, and Shanghai-Shenzhen 300 constituent stocks. Starting on October 10th, the open market operations office began accepting applications from eligible securities, fund, and insurance companies. The previously announced special re-lending program aims to guide banks to provide loans to listed companies and major shareholders to support stock buybacks and increases. From a market effect perspective, the series of innovative policy tools by the PBOC have stimulated market vitality, ushering in a new era for China's stock market.

The policy tools created by the PBOC to support the capital market reflect several innovative features. First, the design of the Securities, Funds, and Insurance companies Swap Facility aligns with the central bank's asset portfolio management principles. Generally, due to the risk level of the stock market, central banks do not directly purchase and hold corporate stocks (except for the Bank of Japan), but rather purchase more bonds, especially high-quality bonds such as government bonds and policy bank bonds. In routine operations, the PBOC can accept high-quality bonds like government bonds as collateral; the new policy tool expands the list of acceptable assets to include stock ETFs and Shanghai-Shenzhen 300 constituent stocks. Since the new tool is an asset swap, the PBOC does not bear the risk of stock devaluation (market risk) but only the risk of bond devaluation.

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Second, the PBOC lends out highly liquid assets such as government bonds and central bank bills, rather than directly lending to securities, fund, and insurance companies, thus the total money supply is not affected. Securities, fund, and insurance companies can use these high-grade bonds to obtain almost equivalent financing. Third, according to sources close to the central bank, the swap facility term does not exceed one year and can be extended upon expiration, which investors might consider as relatively long-term financing. Ordinary collateral loans have a shorter term, while the collateral loan term under the new policy tool should be longer, as stock assets have higher short-term volatility and are relatively stable in the long term; the longer-term arrangement should be the original intention of the new policy tool design. If the swap term is too short, given the high volatility of the stock market itself, securities, fund, and insurance companies would not dare to pledge or hold stocks for a long term but would hope to redeem stocks and cash out as soon as possible, which is not conducive to the healthy and stable development of the capital market. Finally, the new policy tool aims to support securities, fund, and insurance companies in the long term, change the institutional investment structure of China's capital market, and is beneficial for establishing a long-term mechanism for the intrinsic stability of the capital market and enhancing the breadth and depth of the capital market. Generally, central bank policies favor commercial banks and only provide liquidity to securities, fund, and insurance companies when it is necessary to stimulate the economy; the new policy tool expands the coverage of the PBOC's monetary policy.

The capital market is still most concerned about the effectiveness of the new policy tool, as this is a bold attempt by the PBOC. There is a saying in the foreign exchange market: Never bet against the central bank. This saying also applies to the stock market; trusting the central bank is always right! Looking at the practices of foreign central banks, the policy effects of central banks supporting the capital market are very significant.

In the last decade, the United States experienced two major financial crises, and the Federal Reserve quickly introduced unconventional monetary policy tools to stabilize the financial market situation in a relatively short time, and the stock market also returned to a long-term continuous upward trajectory.

From 2007 to 2009, the U.S. financial crisis erupted due to the collapse of the housing mortgage market bubble, whose destructive power was second only to the Great Depression period from 1929 to 1933. The S&P 500 index once fell by 51%, and financial institutions were in distress. According to data from the Federal Deposit Insurance Corporation, the number of bank failures from 2008 to 2011 were 25, 140, 157, and 92, respectively. At the same time, the crisis almost paralyzed the American International Group (AIG, an insurance company) and led to the collapse of three investment banks (securities companies). The crisis led to a rapid disappearance of liquidity in the financial system, forcing the Federal Reserve to intervene urgently with regard to capital market policy tools.

The Federal Reserve's market rescue was effective, and the stock market returned to normal. In 2008, the U.S. S&P 500 index fell by 38.49%, but the performance from 2009 to 2012 was an increase of 23.45%, 12.78%, 0.0%, and 13.11%, respectively. Admittedly, the subsequent changes in the stock market were influenced by other factors, but the Federal Reserve's market rescue at least boosted market confidence and allowed investors to regain their sanity. As shown in Table 1, the Federal Reserve's support for primary dealers was the greatest, with nearly $9 trillion in loans, far greater than the other policy tools listed in the table. The Federal Reserve also introduced other unconventional market rescue policy tools, such as "Asset-Backed Commercial Paper Money Market Fund Liquidity Facility," "Commercial Paper Funding Facility," "Money Market Investor Funding Facility," "Term Asset-Backed Securities Loan Facility," etc., but their impact was smaller, or the loan amounts were lower, so they are not listed.

The COVID-19 pandemic in 2020 once again put the U.S. financial market in a precarious situation. Faced with the sudden pandemic, the U.S. financial market and investors were panicked, and it seemed that the only risk-avoidance strategy was to rapidly sell off their assets, with non-U.S. dollar currencies, oil, gold, stocks, cryptocurrencies, and commodities all showing a synchronized sharp decline. Since the introduction of the circuit breaker mechanism, the United States has experienced five circuit breaker events, with the exception of the 1987 event, the other four occurred consecutively on March 9, 12, 16, and 19, 2020, and the financial market situation deteriorated so rapidly that it was unprecedented! On March 11, 2020, then-President Trump of the United States convened a meeting at the White House with the presidents of Wall Street's major banks to discuss market rescue measures, but the Wall Street magnates were at a loss.

In the face of an extremely severe financial situation, the Federal Reserve acted decisively and with full force. Since February 19, 2020 (when the S&P 500 index reached a historical high), the volatility index average soared from the previous 13.79 to 39.84; on March 20, the daily fluctuation value of the U.S. ten-year Treasury bond reached 65.1, with the normal fluctuation level being below 10; the daily average volatility of the U.S. dollar index soared from 0.2% in the first phase to 0.94% in the second phase. The financial and economic situation prompted the Federal Reserve to respond quickly, so the timing density and policy strength of the market rescue measures were unprecedented. The Federal Reserve massively purchased Treasury bonds and real estate mortgage-backed securities; lent a large amount of money to banks and bond brokers; provided dollar loans to foreign central banks through currency swaps to alleviate the overseas dollar shortage; established multiple loan facilities to provide credit to the money fund market, corporate bond issuers, local governments, and various ordinary enterprises. The Federal Reserve's market rescue plan and scale have transcended the traditional functions of a central bank, but due to the severity of the pandemic, the Federal Reserve took the initiative to undertake the market rescue task.

The Federal Reserve's dense introduction of market rescue measures played a role in stabilizing the financial situation and injecting confidence into the market. In 2020, the S&P 500 index rose by 18.4%; in 2021, it rose by 28.7%; under the high pressure of the interest rate hike cycle, it fell by 18.11% in 2022, but rose by 26.29% again in 2023. The stability of the U.S. stock market has produced a strong spillover effect, and European and Japanese stock markets have also reaped dividends. Unlike the financial crisis from 2007 to 2009, this time the Federal Reserve saved the economy by expanding its balance sheet, so the funds lent through various unconventional monetary policy tools have actually decreased significantly, and financial institutions have obtained greater financial support directly from the asset purchase plan introduced by the Federal Reserve.The Federal Reserve has also paid a heavy price for these policy operations: the risk of bond depreciation has increased. In order to curb inflation, the Federal Reserve had to start aggressive interest rate hikes from March 2022, leading to increased floating losses in bond investments and other financial institutions suffering from varying degrees of floating losses. In 2020, the Federal Reserve suffered a loss of $926 million, which was balanced in 2021; in 2022, as interest rates soared, the bonds held by the Federal Reserve depreciated, resulting in a loss of $16.6 billion for the year. Furthermore, due to high interest rates, the loss soared to $133.3 billion in 2023. In addition, other financial institutions have suffered significant losses in bond investments, with the collapse of banks such as Silicon Valley and Signature serving as a footnote to the rapid adjustment of monetary policy. However, compared to the performance of the U.S. stock market, the price paid is worth it.

To suppress interest rate levels and support the stock market, the Bank of Japan has long purchased Japanese government bonds and corporate bonds, as well as indirectly supported the stock market through the purchase of trust products and ETF funds. As shown in Table 3, the proportion of government bonds held by the Bank of Japan in the total market value of Japanese government bonds increased from 32.68% at the end of 2015 to 46.95% at the end of 2023; as the Bank of Japan further intervened in the domestic stock market, the highest proportion of stocks held reached 5.38% in 2022.

The Bank of Japan's capital market support policy operations do not conform to the usual practices of central banks, nor do they have an exit timetable. The Bank of Japan's long-term large-scale intervention in the market has suppressed the market's operational mechanism (especially the interest rate market). The Bank of Japan has become the largest holder in the domestic bond market and controls medium and long-term interest rate levels through the buying and selling of government bonds, rather than adjusting short-term interest rates. The Japanese stock market has indeed improved, with the Nikkei 225 index showing a considerable increase in the past decade, breaking the record set 34 years ago at the beginning of this year.

The Federal Reserve's policy strategy to support the capital market differs from that of the Bank of Japan: the Federal Reserve's policy focus is to support the bond market, and it is a short-term action. Once the market returns to rationality, the Federal Reserve begins to exit in an orderly and gradual manner; the Bank of Japan's focus is on the bond and stock markets, which is a long-term action. Both central banks have achieved significant policy effects in supporting the stock market.

The capital market has the highest degree of marketization, with the forces of buyers and sellers determining price levels. However, it is a market participated in by many investors and is inevitably affected by investor sentiment. The market may sometimes fail, and investors may temporarily lose rationality, leading to market disorder. Government intervention in the market is entirely necessary. Looking at Western central banks, market intervention is also one of the central bank's functions, and it is the time for central bank intervention when market pessimism prevails.

The new policy tool of the People's Bank of China is a "timely rain" for the stock market, expected to provide long-term liquidity support for securities, funds, and insurance companies. It is a long-term good news for capital market investors, indicating that the development of the stock market has ushered in a new turning point. Investors need to wait patiently for the policy effects. The market cannot be reversed overnight and there will be some minor setbacks, but the basic development direction is positive.

The central bank's capital market support policies require corresponding supporting reforms, and the governance of listed companies should be another focus. Corporate governance reform is imminent, requiring the discovery, excavation, and release of the potential value of listed companies, as well as the improvement of listed company stock prices. Corresponding measures should include board reform, mergers and acquisitions and restructuring, competitiveness enhancement, company stock buybacks, institutionalization of dividend distribution, and improvement of return on net assets. In summary, corporate management must further focus on enhancing the monetary value of enterprises.