NextFin News - China's central bank cut the cost of buyback financing to 1% and approved a third round of its stock-backed swap facility on Monday, combining cheap credit, regulatory easing, and state-backed ETF purchases into a coordinated defense of a stock market that has lost about a fifth of its value from its June peak. The benchmark CSI300 Index fell 8.5% in October, its worst month since early 2016, and the technology-heavy STAR50 has dropped roughly 40% from its July high, erasing about $480 billion in market value in less than four months.
The People's Bank of China, the National Financial Regulatory Administration, and the China Securities Regulatory Commission announced the measures after a 12-week losing streak that left the CSI300 at 4,016.92 on November 2, down 6.81% for the month and 13.68% over the year. The Shanghai Composite stood at 3,638.03 points, up 1.08% on the day but down 4.56% over the past month and 8.51% over the year. The question the package answers is whether a liquidity-and-buyback shield can stabilize prices without fixing the earnings and property problems underneath. The short answer: it can stop a washout, but it cannot manufacture earnings.
The contrast that defines the moment is stark. Chinese equities are trading at their widest discount to U.S. stocks in history: the S&P 500 is up about 11% in 2026 while a broad China equity fund is down 18%, a record 30-point gap in relative performance. That gap is not just a valuation story; it is a confidence story. And confidence, unlike liquidity, cannot be created by a central bank swap line.
The Package: Three Tools, One Objective
The centerpiece is a shift from temporary firefighting to a standing backstop. The relending facility that funds share buybacks and shareholding increases, launched in 2024 as a temporary measure, will become a long-term arrangement, and its relending rate was cut to 1% from 1.25%. The central bank said financial institutions should set lending rates reasonably on market-based pricing principles and expand lending under the facility. At 1%, the funding is cheaper than the dividend yield on many of the index heavyweights that regulators are urging to buy back shares, which makes the arithmetic of a buyback accretive even without any earnings growth.
Alongside that, the PBOC will conduct its third operation under the Securities, Funds and Insurance Companies Swap Facility, with a one-year term that can be extended depending on market conditions. Thirty-one securities and fund companies have applied, requesting more than 100 billion yuan, about $15 billion. Introduced in October 2024, the SFISF lets brokers, fund managers, and insurers pledge bonds, stock exchange-traded funds, and CSI300 constituent shares as collateral in exchange for highly liquid assets such as Treasury bonds and central bank bills, improving their capacity to add stock holdings. The first two operations, in October 2024 and January 2025, totaled 105 billion yuan.
The mechanics matter. The SFISF does not inject base money directly into the economy the way a reserve requirement cut would; it swaps illiquid assets for liquid ones on the balance sheets of financial institutions. That means it targets the specific problem of institutions that want to hold stocks but need liquid collateral to fund those positions. It is a backstop against forced selling, not a broad stimulus. That design is why its impact is largest during liquidity stress and smaller when the problem is a lack of buyers rather than a lack of funding.
The CSRC added a regulatory layer: it will soon revise buyback rules to allow repurchases when shares fall below their issue price, and it will require index heavyweights, technology leaders, and firms that raised excess capital to establish dedicated repurchase funds. In the first ten months of the year, 645 listed companies on the Shanghai and Shenzhen exchanges disclosed 700 repurchase plans totaling 237.7 billion yuan, with both planned and actual repurchase amounts hitting record highs, the regulator said. About 115 billion yuan of that was earmarked for buybacks with cancellation, and 747 companies actually carried out 134.5 billion yuan of repurchases.
"Stock repurchase is an important tool for listed companies to manage their market value, and a key means to stabilize stock prices and convey development prospects and confidence," a CSRC official said in response to a media query.
The three departments also said they would optimize margin-financing collateral ratios and requirements under risk control to moderately release financing space, after the A-share margin balance shrank by about 700 billion yuan over four months, and accelerate new equity and multi-asset index products. A first batch of 18 active ETFs has raised more than 35 billion yuan as of November 2.
Loans for share buybacks and shareholding increases have reached about 440 billion yuan in signed agreements, with more than 280 billion yuan already disbursed, according to the CSRC. The scale is structural relative to the overall A-share market capitalization, which is why its role is more about stabilizing expectations and easing liquidity pressure during volatility than about delivering a large incremental funding shock. For context, daily turnover in the A-share market routinely exceeds 1 trillion yuan; the buyback channel is a stabilizer at the margin, not a replacement for organic demand.
Why the Rally Broke: A Cyclical Washout, Not a Structural Reset
The market that Beijing is now defending is not the same market that rallied earlier in the year. The CSI300 is down about 20% from its June high, putting it in technical bear-market territory, while the STAR50, packed with artificial-intelligence and semiconductor names, has fallen roughly 40% from its July peak. The damage is concentrated: AI and technology stocks had grown to a large share of total market value and trading volume, so a single reversal hit almost everything. Even after the crash, the STAR50 traded at a multiple far above developed-market peers, with the Nasdaq 100 at roughly 30 times earnings against a triple-digit multiple for China's AI-heavy index at its peak.
This is a cyclical washout driven by three short-term forces, and it matters because cyclical declines respond to liquidity in a way structural ones do not. First, positioning was crowded, and crowded trades unwind violently. Second, valuations stretched ahead of earnings; the rally ran on expectations of AI demand that have not yet shown up in profits. Third, the macro backdrop deteriorated: the manufacturing purchasing managers' index fell to 49.3 in October from 50.1 in September, a three-month low, and non-manufacturing activity slipped to 49.7, its sixth contraction this year, while retail sales grew only modestly.
The transmission mechanism is straightforward. When a crowded, high-valuation segment rolls over, forced selling and margin calls feed price declines, which trigger more selling. The 700 billion yuan shrinkage in margin balances over four months shows the deleveraging already underway. Liquidity tools interrupt that loop: the SFISF gives institutions liquid collateral so they do not have to sell stocks to raise cash, and cheap buyback credit gives companies a reason and a means to buy their own shares instead of watching them fall. That is why the policy mix targets the plumbing of the decline rather than the economy underneath it.
History offers a precedent for why this can work in the short run. When Central Huijin began buying ETFs aggressively in 2023 and 2024, the correlation between state purchases and index stabilization was clear: the floor appeared wherever the buying concentrated, particularly in the large-cap indexes. The difference now is that the buying is being institutionalized rather than deployed as an emergency measure, which makes the floor more predictable but also more permanent.
But liquidity can stop a washout; it cannot manufacture earnings. The property sector's debt overhang, which ties up a large share of household wealth, remains unresolved, and consumption has stayed soft. A cyclical price floor is therefore the realistic objective, not a new bull market. The distinction is not academic: if the decline were structural, no amount of swap-facility liquidity would hold, and treating a cyclical fall as structural would mean missing a rebound.
The Second-Order Shift: The State Becomes the Marginal Buyer
The less obvious consequence of this package is how much it accelerates the state's role as the dominant marginal buyer of Chinese equities. Central Huijin Investment, part of the country's sovereign wealth apparatus, said this month that it had expanded the scope of its ETF holdings in recent days and would "continue to increase its holdings and expand the scale of the holdings, so as to resolutely safeguard the stable operation of the capital market," without disclosing an amount. Analysts at UBS estimated national-team ETF buying reached about $57 billion this year, while an independent research analysis put Central Huijin's ETF holdings at $180 billion by the end of August 2025.
That footprint changes how the market works. When the state is the largest buyer of broad index ETFs, the floor under the index becomes a policy variable rather than a discovery of value. Volatility is suppressed, and the correlation between index heavyweights and policy announcements rises. The CSRC's requirement that index heavyweights and technology leaders maintain dedicated repurchase funds formalizes this: the largest constituents now carry an implicit mandate to support their own prices, which further decouples index performance from the average listed company.
The cross-asset implication is a bifurcated market. Companies with access to the 1% relending facility and those inside major indexes get an engineered floor. Smaller companies outside the indexes, without cheap buyback credit, do not. Passive ownership of A-shares rises structurally as the state accumulates ETFs, and price discovery weakens at the margin. Tail risk does not disappear; it migrates onto the sovereign balance sheet.
There is also a currency dimension. A stable or rising equity market supports the renminbi by improving the return profile of yuan-denominated assets for foreign investors, while a continuing selloff would add to capital-outflow pressure. The swap facility, by making it easier for institutions to hold stocks without selling bonds, reduces the likelihood that equity weakness forces a round of bond liquidation that would push yields higher and tighten financial conditions further. The policy is as much about defending the transmission mechanism of monetary policy as it is about supporting stock prices.
The Counter-Case: Cheap Money Cannot Fix Earnings
The strongest argument against this package is that China has tried versions of it before, and the rallies have not lasted. State-backed buying can arrest a decline, but without an earnings recovery and a resolution of the property overhang, every relief rally becomes a selling opportunity for investors who remember 2015 and 2024. There is also a moral-hazard problem built into "defensive repurchases" financed at 1%: companies can use cheap loans to support their share prices rather than invest in capacity, research, or higher wages, which is what would actually lift earnings and consumption.
This counter-thesis attacks the core of the bullish read: that liquidity alone can restore confidence. It has weight because the transmission from buybacks to confidence depends on investors believing the floor is durable, and durability depends on fundamentals, not financing costs. If corporate profits keep falling, a buyback floor cracks just like any other support level. Skeptics at major global investment banks have warned that authorities are unlikely to engineer a broad-based rebound akin to the 2024 pivot, which would require more powerful tools than have been signaled to date.
The counter-case also points to the limits of the buyback channel itself. Buybacks support prices only if companies have the cash flow or the borrowing capacity to keep buying. A company that funds repurchases with 1% loans is adding leverage to its balance sheet at the same time its earnings are under pressure. That trade works in a cyclical downturn, when earnings recover and the leverage is absorbed. It does not work in a structural downturn, when earnings keep falling and the debt remains.
The answer is that the package is not trying to fix fundamentals; it is trying to buy time for them to fix themselves. A disorderly 20% decline in the CSI300 would have tightened financial conditions, damaged household wealth, and worsened the very consumption weakness policymakers are fighting. Preventing that spiral is a legitimate and achievable objective. The policy succeeds if it stabilizes the index long enough for earnings to catch up; it fails if it merely postpones the decline while leverage builds inside the buyback channel.
The signal that would prove the bullish liquidity view wrong is specific: if the CSI300 fails to stabilize within about a month of these measures, with the full 440 billion yuan of signed buyback credit drawn down and the SFISF operating, then liquidity is not the binding constraint and the problem is structural earnings weakness. A second falsifier is forward earnings revisions: if analysts keep cutting 2027 profit estimates for CSI300 constituents through the first quarter of next year, the floor will not hold regardless of how cheap the financing is. A third is the margin balance: if the 700 billion yuan deleveraging accelerates rather than stabilizes, forced selling will overwhelm the buyback channel.
What Comes Next
In the short term, the market reaction hinges on execution. Investors will watch how much of the more than 100 billion yuan requested under the SFISF is actually granted in the operation, whether the CSRC publishes its revised buyback rules quickly, and whether Central Huijin's ETF buying continues at pace. A strong follow-through could produce a relief rally in index heavyweights and technology leaders; the Shanghai Composite's 1.08% gain on November 2 shows the market is already pricing some support. The renminbi and A-share turnover are the two real-time tells: if turnover expands on the rally, the support is attracting private capital; if turnover stays thin, the rally is being carried by the state alone.
Over the medium term, the base case is a stabilized but range-bound market: liquidity tools cap the downside, but weak earnings and property drag keep the upside contained. The upside case requires the policy mix to work as intended: buybacks support prices, earnings revisions turn positive, and property sales stabilize, allowing the CSI300 to reclaim a meaningful share of its June peak. The downside case is that the relief rally fades, earnings cuts continue, and the state is forced to buy more aggressively, deepening its role as the marginal buyer while smaller stocks continue to underperform.
The long-term structural question is whether China's equity market can transition from a policy-driven, state-supported market to one anchored in corporate profitability and shareholder returns. The buyback regime, if it becomes permanent and disciplined, could be a step toward that future. If it becomes a permanent subsidy for price support, it will have bought stability at the cost of price discovery.
China has built a floor under its stock market out of cheap credit, state buying, and regulatory mandates. Floors stop falls; they do not create returns. The market's next move depends less on how much Beijing is willing to spend than on whether earnings can finally grow into the prices that liquidity is holding up.
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