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Text: Ren Zeping Team

Introduction

At the beginning of the year, the market was hotly discussing the entry of stabilization funds into the market. Now, with the disclosure of the first quarterly report, Huijin has confirmed that the stabilization funds for increasing its holdings of ETFs have exceeded 300 billion yuan. At present, the A-share market is still fluctuating around 3,000 points. Should a stabilization fund be clearly introduced? How strong should it be? How to better play the role of a "stabilizing force"? This article will explore the details.

Core Viewpoint

Stabilization tools refer to policy-based financial instruments established by the government to address systemic risks brought about by sharp fluctuations in asset prices, inject liquidity to restore normal market operations and play the role of a "stabilizing force".

Looking at the experience of various economies over the past 30 years, stabilization tools can be roughly divided into "financial guarantee type" and "stock market stabilization type".The stabilization fund is mainly used to save institutions rather than markets. As long as a threat is posed to the financial system, the government or the central bank can inject liquidity through lending, acquisitions, etc. The advantages are flexible mechanisms and wide-ranging effects. The disadvantages are that it can easily create expectations of "too big to fail". Representative economies are the United States and the European Union. A typical case is that during the subprime mortgage crisis, the U.S. federal government took over the "two houses" to curb the spread of the crisis.“Stock Market Stabilization”Stabilization funds are mainly used to save the market rather than institutions. They support stock market confidence by purchasing stocks and ETFs in the capital market. The advantage is that it boosts capital market expectations. The disadvantage is that the factors affecting the stock market are more complex, and it takes wisdom to exit. Representative economies are Japan and Hong Kong, China.

Whether the stabilization tool can play its role as a "stabilizing force" depends on two key considerations:

First, which is better, saving the market or saving the institutions?1) Choose the stock market stabilization type: Saving the stock market can boost confidence, stock prices are the key target, and more retail investors are more suitable. 2) Choose the financial guarantee type: Saving institutions can boost confidence, the impact of institutional bankruptcy is too large, and when the market is highly mature, the incentives of the overall market index are limited. 3) The central bank's policy style directly determines the category of stabilization tools used, and the choice of stabilization tools for an economy often remains unchanged for decades. 4) Stabilization tools must be highly matched with the characteristics of the capital market and systemic risk characteristics of the implementation area, and there is no saying that one category is better. The two are not a choice between the two, and using them together may be more effective.

Second, the introduction of a clear mechanism is the preferred option based on long-term considerations.1) Separate legislation to use stabilization tools is a good measure to mitigate the impact of policy sequelae. 2) Mechanized stabilization tools can be better withdrawn after the rescue. 3) Mechanized stabilization tools can effectively prevent corruption and rent-seeking. 4) Mechanized stabilization tools can control market expectations by establishing appropriate funding standards. 5) Transparency needs to be reasonably planned to avoid market arbitrage.

my country's construction of the stabilization tool system does not copy the experience of other countries. The dual-track parallel model of financial security and stock market stabilization combines high and low levels and takes into account both the near and long term, and the construction plan is reasonable and meticulous.Among them, the Financial Stability Guarantee Fund has been established and is in operation, and will officially protect the financial system after the Financial Stability Law is established. Stock market stabilization tools mainly play a stabilization role for stabilization funds entering the market, and have been used in 2015 and 2023.

Although we have had the practice of stabilization tools before, we still need to establish larger-scale and more systematic stock market stabilization tools in the future!First, we must protect the capital market and ensure the wealth effect so that residents will dare to invest and consume.At the end of 2021, there were more than 720 million fund investors in China, and in July 2023, the number of Chinese stock investors exceeded 220 million. The ups and downs of the capital market affect the wallets of hundreds of millions of people, and the rational stability of the capital market is the basis for residents to actively invest.two isPerfecting the stabilization tool system provides support for the construction of the capital market, and a stable capital market ecology is an excellent soil for the development of scientific and technological innovation and high-quality productivity.As of March, there were 570 companies listed on the Science and Technology Innovation Board, with each company raising an average of 1.596 billion yuan. A stable capital market attracts and fosters innovative companies to go public, and a mature capital market helps innovative companies improve quality and efficiency.

From the perspective of improving the efficiency of capital utilization, systematic stock market stabilization tools transmit signals more directly.At present, the operation of my country's stabilization funds is relatively obscure. Apart from the increase in holdings by Huijin Investment and China Securities Finance Corporation, which will cause market interpretation, the remaining funds are only used at the trading end and cannot leverage market confidence through information transmission.Only with the Financial Stability Law as a foundation can the financial stability guarantee system function normally.The Financial Stability Law is a basic law for preventing financial risks. The formal establishment of the Financial Stability Law will integrate China's financial guarantee system from top to bottom, and will also formally awaken the Financial Stability Guarantee Fund and improve the path of my country's financial guarantee-type stabilization tools.

In the long run, we need to build consensus, work hard to develop the economy and boost confidence.The stock market is the barometer of the economy. Development is the fundamental solution to all problems. We should put development as the top priority, work hard on the economy, and start a new round of economic stimulus plans. Comparing with similar development stages in Japan, South Korea, Taiwan, Argentina, Malaysia and other countries, and the challenges they face, we find that economic transformation still has both positive and negative laws and lessons. We hope that we can make the right choice. As long as we respect economic laws and common sense, we will definitely make the right choice. There is no news in economic history. China's economic potential is huge. As long as we work hard on the economy, the future is bright. Come on, China!

Table of contents

1 What is a levelling tool?

2 Historical experience in using balancing tools

2.1 The United States: Insisting on rescuing institutions, often spending huge sums of money on temporary emergency measures

2.2 EU: gradually establishing an institutional safeguard mechanism

2.3 Japan: The earliest and most radical market rescueAdhere to the stabilization fund form

2.4 Hong Kong, China: Stabilization funds enter the market to strongly win the fight to save the Hong Kong dollar.The battle to save the stock market

3. Reflections on the historical experience of balancing tools

3.1 Financial security andHow to choose the stock market stabilization type?

3.2 Is it necessary to introduce clear mechanism rules first?

4. China’s Stabilization System Practice and Future Vision

4.1 China's stabilization system practice: financial guarantee and stock market stabilization in parallel

4.2 Why is the stabilization tool system constructed in this way?

4.3 Outlook: Orderly promote the construction of China's stabilization tool system

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The construction and use of stabilization tools are key to safeguarding the effective operation of the capital market.The concept of "stabilization fund" is often widely discussed when the market is turbulent. It has become a symbol of the government's support for the market. In 2023, the market faced irrational fluctuations, and the "stabilization force" decisively helped the market return to normal track. The new Chairman of the China Securities Regulatory Commission, Wu Qing, also said at the closing of the 2024 Two Sessions Economic Theme Press Conference:"Once the market deviates seriously from fundamentals and experiences irrational and violent fluctuations, liquidity drying up, market panic, and serious lack of confidence, we must act decisively to correct the market failure. In this regard, we already have some effective practices, and we will improve relevant mechanisms to resolutely prevent systemic risks."

"One can learn from others' experience to polish jade" is a valuable reference. However, stabilization tools are generally used in a targeted manner during market shocks, and are affected by regional systems and event styles, resulting in great differences. It is difficult for the market to unify the precise definition of stabilization tools, and the scope of analysis varies.This article reviews the use of stabilization tools by economies around the world in the past 30 years and divides them into two categories based on their mechanisms of action: "financial protection" and "stock market stabilization".Explore the reasons for choosing different types of tools, summarize usage experience, and explore the direction of building my country's stabilization tools.

1 What is a levelling tool?

Stabilization tools refer to policy-based financial instruments established by the government to address systemic risks brought about by sharp fluctuations in market asset prices. They generally help the market resume normal operations by injecting liquidity.Based on the experience of using stabilization tools over the past 30 years, they can be roughly divided into "financial guarantee type" and "stock market stabilization type".The "financial guarantee type" focuses on supporting financial institutions by guaranteeing loans, etc. The "stock market stabilization type" focuses on supporting the stock market by injecting capital into the market, etc.

Stabilization today is more focused on supporting the market.The term "stabilization" comes from "Historical Records: Book of Stabilization", which refers to the measures taken by the ancient government to stabilize prices. It aims to smooth out irrational fluctuations through reverse operations, that is, selling when market prices rise and buying when market prices fall. However, its actual application in the financial market as a "stabilization fund" is mainly to inject liquidity into the market in an emergency when an irrational plunge in the market triggers systemic risks, helping the market to resume normal operation.The stabilizing effect of selling at a high price has not been reflected in actual application. The government is more pursuing a smooth exit of stabilization tools after use., to prevent "official shares" and "official assets" from interfering with the market's independent operation mechanism.

This article uses “equalization tools” as a general term to avoid confusion.At present, the market is accustomed to using "stabilization funds" to refer to all funds, policies and regulatory means that play a stabilization role. However, "stabilization funds" also specifically refer to "stock market stabilization funds": funds established by the government in a legal manner to smooth out irrational fluctuations in the stock market through reverse operations. In order to avoid confusing the objects of analysis, this article uses "stabilization tools" to collectively refer to the policy means and tools introduced by governments around the world to play a stabilization role.In the analysis, “stabilization fund” only refers to “stock market stabilization fund”, which is one of the categories of stabilization tools.

2 Historical experience in using balancing tools

A total of 21 cases of the use of stabilization tools in countries around the world over the past 30 years have been sorted out, including 9 cases of "financial guarantee type" and 13 cases of "stock market stabilization type", with significant differences in categories and prominent regional characteristics. The cases of the most representative economies are summarized and analyzed as follows:

2.1 The United States: Insisting on rescuing institutions, often spending huge sums of money on temporary emergency measures

The United States is the birthplace of stabilization funds. It insists on saving institutions rather than markets, mainly uses temporary stabilization tools, and has not established a long-term stabilization system.The original form of the stabilization fund was in 1907, when the Federal Reserve had not yet been established. In order to cope with bank runs, several large banks such as Morgan established their own "funds" to provide funds to troubled financial institutions.The tradition of guardian institutions continued with the establishment of the Federal Reserve in 1913 and in the response to every subsequent financial crisis.

The 1987 "Black Monday" market stampede was caused by similar quantitative trading strategies and portfolio insurance. Both will trigger a vicious cycle of selling, market liquidity will dry up and destroy market confidence. On October 19 alone, the Dow Jones Index fell 508 points, the largest single-day drop since 1914.The Fed under Greenspan responded to the stock market crash without trying to reverse the decline in stock prices or setting a specific stock price target. The Fed focused on cushioning the negative impact of the stock market crash.The next day, the Federal Reserve announced unlimited liquidity to support the stable operation of the economy and financial system. The specific operation was to lend cash at the discount window to ensure the liquidity of financial institutions. It also put pressure on large financial institutions to guide them to help each other and provide credit loans to institutions in trouble. Financial institutions gained liquidity and confidence, breaking the downward cycle mechanism, and the market quickly resumed normal operation.

The 1998 LTCM crisis was caused by the collapse of the LTCM hedge fund's highly leveraged strategy in the "Russian default" incident. LTCM borrowed money from most of the major Wall Street financial institutions. If it went bankrupt and liquidated, it would have a huge impact on the financial market. The Federal Reserve had to persuade 14 major Wall Street companies to take over LTCM. While successfully preventing the market from collapsing, it alsoThis has sparked a lot of discussion about the fairness of “too big to fail”.

The 2008 subprime mortgage crisis originated from the bursting of the real estate bubble at the top of the financial cycle, and the US economy declined rapidly. The bankruptcy of Lehman Brothers, the acquisition of Merrill Lynch, and the near-collapse of American International Group (AIG) severely damaged market confidence. The Federal Reserve took a series of measures: 1) Providing AIG with a special loan of 85 billion. 2) Implementing a 700 billion US dollar capital acquisition plan, successfully stabilizing the collapse trend of the banking industry by purchasing preferred stocks of banks and other financial institutions. 3) The Federal Reserve provided 200 billion US dollars in financing to prepare a 700 billion US dollar non-performing asset rescue plan to be reused in financial institutions. However, the subprime mortgage crisis was extremely destructive, and the subsequent implementation of QE in the United States reversed the economic trend.

The outbreak of the epidemic in 2019 triggered a market decline. Homogeneous transactions, margin and redemption pressures intensified asset sales, and the market panicked in pursuit of liquidity. U.S. stocks plummeted, with four circuit breakers in 10 days, and the panic index exceeded the peak of the 2008 financial crisis. Faced with the liquidity crisis, the United States still used the same response as in 1987, but with greater force and more comprehensiveness. The Federal Reserve did not invest in the market to support stock prices, but instead launched CPFF, MMLF, PDCF, PMCCF, SMCCF, TALF and other tools to directly inject liquidity into various sectors such as banks, primary dealers, money market funds, enterprises, residents, and overseas central banks. The Ministry of Finance activated the foreign exchange stabilization fund of 500 billion yuan to support loans, loan guarantees and affected investment businesses.

2.2 EU: gradually establishing an institutional safeguard mechanism

The EU's stabilization tools are relatively mature. From emergency funds to long-term mechanisms, from the national level to the institutional level, a complete system of stabilization tools has been gradually built., and also helped the EU successfully overcome the 2008 global financial crisis and the subsequent European debt crisis.

Financial Stability Fund (EFSF)The EFSF originated from the 750 billion euro rescue plan jointly launched by the EU and the IMF in 2010 to deal with the European debt crisis. The plan lasts for three years and includes 440 billion euros in the Financial Stability Fund, 60 billion euros raised by the European Commission and 250 billion euros provided by the IMF. The paid-in capital of the EFSF is only 184.4 billion euros, but the subsequent introduction of leverage has increased the scale to 1 trillion euros through 4-5 times leverage, and introduced special purpose investment vehicles (SPIVs) to raise funds through bond issuance. The EFSF mainly rescues eurozone member states by providing emergency loans, intervening in the primary bond market when necessary, and directly purchasing national sovereign bonds in the secondary market through SPIVs.

European Stability Mechanism (ESM)It is the replacement of EFSF after the expiration of EFSF in 2013. The original share capital was provided by 17 eurozone member states according to the comparative subscription of 700 billion euros, of which 80 billion was required to be paid in full and 620 billion was guaranteed by member states to be paid at any time. ESM rescues eurozone member states in three ways: 1) directly providing rescue loans to recipient countries. 2) preventing the formation of crises and providing loans to recipient countries and financial institutions for capital restructuring. 3) directly purchasing government bonds in the secondary market to ensure the liquidity of the recipient country's bond market.

ECB Single Resolution Mechanism (SRM)It was established to supplement the lack of EU stabilization tools at the bank level. The responsible objects include systemically important financial institutions such as multinational banking groups, important banks, and financial holding companies. It is managed by the Single Resolution Board (SRB) and implemented by the Single Resolution Fund (SRF). The fund does not specify a target size, but it is not less than 1% of the bank deposits of all member states, about 55 billion euros, and obtains available funds through pre-payment, post-payment, alternative financing loans, voluntary payment, etc. At the same time, the ESM can provide SRF with a loan of up to 68 billion. It is mainly used to provide loans and guarantees for bank asset management, purchase bank assets, and pay compensation to shareholders and creditors.

2.3 Japan: The earliest and most radical market rescuer, insisting on the form of stabilization fund

Japan's stabilization tools mainly intervene in the stock market, and enter the market more and more directly through purchasing stock index components, common stocks, ETFs, etc.As early as World War II, Japan established the Japan Cooperative Securities Company to stabilize stock prices. After that, it launched stabilization funds several times to smooth the downward trend of the stock market, and found the scale of the stabilization fund through continuous trial and error.

In 1964-1965, the US domestic financing and tax increase policy impacted the Japanese stock market, which plunged 23.47%. Japan set up two stabilization funds with a total investment of more than 500 billion yen, but failed to reverse the situation. The stabilization fund rescue failed. It was not until the Japanese government introduced a tax reduction policy and issued deficit bonds to vigorously promote real economic consumption that the Japanese stock market came out of the trough.

In 1995, Japan's economic growth rate turned negative and the Great Hanshin Earthquake brought a strong impact on the Japanese stock market. The Japanese government organized and established a "Stock Market Stabilization Fund", with funds mainly from the banking industry, with a total investment of 2 trillion yen, accounting for about 1% of the market value at the time. The entry of the stabilization fund into the market and the stabilization and recovery of Japan's GDP led to a sharp rebound in the Japanese stock market after the bottoming out, and exceeded the level before the decline at the end of the year.

After 2010, in the face of the global financial crisis, the Bank of Japan took direct action and purchased ETFs directly through trusts. During the epidemic, Japan also stimulated the market by increasing the central bank's annual ETF purchase quota. As of the end of 2023, the Bank of Japan held 37 trillion yen in ETFs, accounting for about 4.3% of the total market value of the Tokyo Stock Exchange.The huge size has indeed effectively supported the Japanese stock market, but how to exit and the impact of the exit are controversial.

2.4 Hong Kong, China: Stabilization funds enter the market to win the battle to save the Hong Kong dollar and the stock market

The stabilization tool used in Hong Kong, China is to mobilize foreign exchange funds to enter the stock market to resist external short selling.Hong Kong implemented a linked exchange rate system. Under the dual pressure of the US dollar interest rate hike and the Hong Kong stock market bubble burst in 1998, Hong Kong stocks became the target of international hot money short selling and arbitrage.The key to the short-selling strategy is to force the Hong Kong stock market to fall and make profits by short-selling stock index futures. Therefore, the point of the Hong Kong stock Hang Seng Index becomes a key battlefield against short-selling forces.In August 1998, international hot money launched an attack by selling foreign exchange and Hong Kong stocks. The Hong Kong government showed its strong determination to protect the market and always held the 7,000-point mark. On August 14, the Hong Kong Monetary Authority used the foreign exchange fund for the first time to enter the stock market and futures market, and bought a large number of blue-chip stocks and bills, and started a tug-of-war with short-selling forces. The Hong Kong government used a total of more than 15 billion US dollars, accounting for about 13% of the foreign exchange fund and about 3.6% of the total market value of Hong Kong stocks. At the end of August, the short-selling forces were forced to close their positions at high prices due to the arrival of the futures settlement date, and withdrew from the Hong Kong market with heavy losses. This operation of using the foreign exchange fund as a stabilization fund to rescue the market has become a typical case of the stabilization fund helping the market resist external interference.

3. Reflections on the historical experience of balancing tools

Looking at the classic cases of using the above balancing tools, it is not difficult to find differences between the cases.The key lies in two questions: 1. Does the stabilization tool inject liquidity by rescuing financial institutions or injecting capital into the stock market? 2. Should the stabilization tool first issue clear mechanism rules as a basis?

3.1 How to choose between financial security type and stock market stabilization type?

Should we choose financial guarantee or stock market stabilization? The key is whether rescuing institutions or rescuing the market can boost market confidence. In addition, factors such as capital efficiency and investor structure should also be considered:

1) Choose the stock market stabilization type: Saving the stock market can boost confidence, the stock price is the key indicator, and it is more suitable for more retail investors.The risks that broke out in Japan, South Korea and other countries during the global financial crisis in 2008 were mostly transmitted from the United States to their own countries through channels such as currency and asset prices. The collapse of confidence was first reflected in stock market levels and asset prices.Raising stock prices can support market confidence more directly than guaranteeing financial institutionsTherefore, Japan and South Korea have used stabilization funds to enter the stock market to support stock prices, with very good results;If stock prices are the key indicator of the crisis, saving the stock market is a must.In the 1998 Hong Kong Defense War, the Hong Kong stock price was an important target for international short-selling forces to recover cash flow. Keeping the stock price above the put option liquidation line became the winning chess piece to defeat the shorts. The stabilization fund entered the market to defend the 7,500-point liquidation line and became the "decisive factor" to directly lock in the victory;Stock market stabilization tools are more effective in capital markets with more retail investors.Compared with institutional investors and foreign investment, retail investors are more easily guided by emotions. Capital markets with a high proportion of retail investors are more likely to see stock market stampedes due to the spread of market panic, and are also more likely to be motivated by the entry of stock market stabilization tools to raise the price.

2) Choose financial guarantee: Saving institutions can boost confidence, the impact of institutional bankruptcy is too great, and when the market is highly mature, the incentives for the overall market position are limited.The United States is the source of the subprime mortgage crisis. Its market collapse was caused by the bursting of the credit bubble. The debt risk outbreak led to financial institutions being the first to be hit. Events such as bank closures and the bankruptcy of Lehman Brothers caused market panic.Saving institutions obviously boosts confidence more than saving stock prices，As a result, the United States launched a series of financial protection measures and successfully stabilized the situation;If the impact of an institution's bankruptcy is too great, rescuing the institution is a must.In the 1998 LTCM crisis, because LTCM's business was deeply embedded in the asset chain of all Wall Street companies, rescuing LTCM and achieving a soft landing became the only option for the Federal Reserve;Financial security is more effective in capital markets where institutional investors and foreign capital account for a relatively high proportion.When the proportion of institutions is high, the market stampede is more due to the overlap of trading mechanisms rather than market panic. At this time, ensuring sufficient cash flow of institutions to avoid institutional cash-out strategies is more direct and effective than raising institutional confidence through stock market points.

The central bank's policy style directly determines the categories of stabilization tools used, and an economy's choice of stabilization tools often remains unchanged for decades."Black Monday" was a typical stock market liquidity crisis caused by a stampede and panic, so it was very reasonable to directly inject liquidity into the stock market. Although Greenspan, then chairman of the Federal Reserve, had always advocated using monetary policy to combat the unreasonable fluctuations in stock market value, in the face of the stock market liquidity crisis, he still chose to followThe Fed’s standard operating procedure for responding to crisesAction: Focus on cushioning the negative impact of the collapse of the financial system, first act as the lender of last resort for institutions, and then force financial institutions to abandon competition and turn to mutual funding. This textbook rescue process runs through every response of the Federal Reserve to the crisis.

The stabilization tools must be highly matched with the characteristics of the capital market and systemic risk characteristics of the implementation area. There is no saying that one category is better. The two are not in a one-or-the-other relationship. Using them together may be more effective.The collapse of investor confidence often stems from both the plunge in asset prices and the paralysis of the financial system. The simultaneous use of two types of tools can support the market through two channels and effectively stabilize market confidence. In 1965, the Japanese government only used the stabilization fund to rescue the market, but the effect was not good. It took a series of policies, interest rate channels, and credit channels to successfully reverse the crisis. South Korea has also paid more and more attention to the coordination of a package of policies in the use of stabilization funds. In 2022, in the face of the epidemic crisis, it used stabilization funds and financial guarantee tools at the same time to strongly support economic recovery.

3.2 Is it necessary to introduce clear mechanism rules first?

Established stabilization tools can mitigate the impact of policy sequelae. Direct intervention in the market can only be an emergency measure, which will lead to market disputes over fairness in the long run.Section 13, Section 3 of the Federal Reserve Act is the foundation of the Fed's crisis response operations. It allows the Fed to lend to institutions outside the banking system in "unusual and emergency circumstances." This provision runs through all U.S. economic crisis response measures in the form of "the Fed acting as a lender of last resort for institutions."Since the "Black Monday" in 1987, the market has been discussing whether this behavior is fair, and the term "too big to fail" has become widely circulated.Later, a political backlash of "anti-Fed trend" was formed. The Dodd-Frank Act was introduced under pressure, and the Act clearly stipulates how to orderly deal with systemically important institutions in crisis.Orderly Liquidation Fund (OLF)It is responsible for the liquidation of financial institutions, which not only addresses moral hazard but also improves the efficiency of financial guarantee and stabilization operations.

The established stabilization tools can be better exited after the market rescue.After using the Stabilization Fund in 1998, Hong Kong established the Tracker Fund to deal with the withdrawal of government shares and funds. By packaging government shares into funds and then marketizing them, it smoothly achieved the withdrawal of stabilization funds.Compared with South Korea's active selling and Japan's long-term holding, Hong Kong's stabilization fund delisting method not only achieves a smooth exit but also protects the effectiveness of the capital market.

Established stabilization tools can effectively prevent corruption and rent-seeking.Codifying the use and management of stabilization tools can clarify the supervision path and establish supervision requirements, effectively avoid the breeding of corruption and rent-seeking problems, and ensure that stabilization funds play an effective role.

Established stabilization tools can control market expectations by establishing appropriate funding standards.The opaque stabilization mechanism induces enterprises to have the expectation that they will be rescued, which raises the market risk appetite and leads to a backlog of risks. Stabilization tools can set reasonable rescue requirements and rescue standards to ensure the effectiveness of fund use. The German Financial Market Stabilization Fund (FMS) clearly stipulates that only financial enterprises that are in a dangerous state due to insufficient liquidity during the financial crisis can be helped. Financial enterprises that are in a dangerous state due to poor management are not within the scope of the fund's assistance.

At the same time, the stabilization fund mechanism should reasonably plan the transparency of information such as market entry standards, timing, and amount, strictly prevent market arbitrage behavior, and maintain the effectiveness of market pricing.

4. China’s Stabilization System Practice and Future Vision

4.1 China's stabilization system practice: financial guarantee and stock market stabilization in parallel

Under the requirements of the new era, two types of stabilization tools are being built in parallel. At present, the Financial Stability Guarantee Fund has been initially established. In terms of stock market stabilization, my country also had experience in using stock market stabilization tools in 2015 and 2024.

1) Financial security type: Financial stability guarantee fund

The Financial Stability Guarantee Fund is an important part of my country's financial stability guarantee system. Since the establishment of the Financial Stability Guarantee Fund was first proposed in the Government Work Report in 2022, it has been successfully built and has begun to take shape after two years of legislative preparation and fundraising preparation.

Its main position is to provide a bottom reserve for the disposal of important systemic financial risks, focusing on the disposal of major systemic financial risks, and is the "last line of defense" in the financial security system. Its funding consists of funds raised from financial institutions, financial infrastructure and other entities, as well as other funds stipulated by the State Council. If necessary, public funds such as the People's Bank of China's re-loans can be used to provide liquidity support for the Financial Stability Guarantee Fund.

2) Stock market stabilization type: operation of stabilization funds

The use cases of stabilization funds in my country were to deal with stock market fluctuations in 2015 and 2023.

2015 case: In June 2015, the stock market fluctuated sharply. On July 5, Central Huijin announced the purchase of blue-chip ETFs. On the same day, China Securities Finance Corporation was entrusted with the responsibility of the stabilization fund and obtained liquidity support from the central bank. It directly or indirectly invested in the secondary market, thus forming a stock market stabilization tool to provide liquidity for the stock market. According to estimates, in 2015, China Securities Finance Corporation received 2.5-3 trillion yuan in funding support from institutions including the central bank, accounting for about 3%-6% of the market value at the time.

Case in 2023: Central Huijin announced to increase its holdings of ETFs amid sharp stock market fluctuations, and the China Securities Regulatory Commission expressed support. China Securities Finance Corporation has not yet entered the stage of coordinating liquidity into the market. According to the fund's annual report, it is estimated that Huijin's holdings will reach more than 300 billion yuan, mainly increasing its holdings of broad-based ETFs. The market reacted strongly, and the Shanghai Composite Index rebounded 4.7% in two days and returned to 3,000 points two weeks later.

In the 2015 case, part of the funds that entered the market were orderly withdrawn from the market through project completion within a few years, and the other part was withdrawn according to market analysis.It has been playing a stabilizing role in the stock market in the form of stabilization funds as a long-term stabilization tool. A rough estimate shows that there are at least 3296.252 billion yuan of stabilization funds in the market, accounting for about 5.144% of the total market value of A shares.Increase holdings when the market is sluggish and reduce holdings when the market is booming. The reverse operation will play a stabilizing role and reduce market volatility.

4.2 Why is the stabilization tool system constructed in this way?

As the "stabilizer" of the capital market and financial system, the construction of the stabilization tool system cannot simply copy existing experience, but should be rationally planned in light of my country's current development status.At present, my country's capital market is still dominated by retail investors, and market freedom and market competition mechanisms are still under orderly construction. Under the new round of capital market reform led by the new "Nine National Policies", strict supervision, risk prevention, and protection of the interests of small and medium-sized investors are important directions for reform. The 2022 Government Work Report pointed out: "Establish a financial stability guarantee fund, give full play to the role of the deposit insurance system and the industry guarantee fund, use market-oriented and legal methods to resolve risks, effectively respond to external shocks, and firmly hold the bottom line of no systemic risks."

The existing model has two parallel tracks, combines high and low, and takes into account both the near and far, and the construction plan is reasonable and meticulous.The Financial Stability Guarantee Fund protects the financial system from systemic risks from a deep and long-term perspective, while stabilization funds protect the market and boost market confidence from a superficial and short-term perspective.

The two types of stabilization tools still have shortcomings, and we look forward to further improvement of the stabilization system.First, improve the Financial Stability Law to release the overall effectiveness of the Financial Stability Guarantee Fund. Second, establish a stabilization fund with a clear mechanism, with a scale of 2-3 trillion yuan, to improve the efficiency of the use of existing stabilization funds and boost market confidence.

The development of high-tech enterprises cannot be separated from the support of the capital market.After the issuance of the Nine Measures, a series of policies were successively issued, including the "Sixteen Measures for the Capital Market to Serve the High-Level Development of Science and Technology Enterprises" and the "Guidelines for the Evaluation of Science and Technology Innovation Attributes (Revised)" to build a capital market to support the development of science and technology innovation enterprises. As of March, there were 570 companies listed on the Science and Technology Innovation Board, with an average fundraising of 1.596 billion yuan per company. A stable capital market attracts and cultivates innovative enterprises to go public, and a mature capital market helps innovative enterprises improve quality and efficiency.

4.3 Outlook: Orderly promote the construction of China's stabilization tool system

The construction of China's stabilization tool system is gradually underway. In the future, it is still necessary to advance the construction of the Financial Stability Law and establish a larger-scale and more systematic stock market stabilization tool.Huijin's increase in holdings, the establishment of the Financial Stability Guarantee Fund, the steady progress of the Financial Stability Law, and the financial sector's resolute attitude in maintaining financial stability are the implementation of the financial work of "stabilizing the market and stabilizing confidence", and the subsequent progress is worth looking forward to!

First, we must protect the capital market and ensure the wealth effect so that residents will dare to invest and consume.According to the latest data, there will be more than 720 million fund investors in China at the end of 2021, and the number of Chinese stock investors will exceed 220 million in July 2023. The rise and fall of the capital market affects the wallets of hundreds of millions of people. The rational stability of the capital market is the basis for residents to actively invest, and systematic stock market stabilization tools will increase residents' confidence.

two isPerfecting the stabilization tool system provides support for the construction of the capital market, and a stable capital market ecology is an excellent soil for the development of scientific and technological innovation and high-quality productivity.After the issuance of the Nine Measures, a series of policies were successively issued, including the "Sixteen Measures for the Capital Market to Serve the High-Level Development of Science and Technology Enterprises" and the "Guidelines for the Evaluation of Science and Technology Innovation Attributes (Revised)" to build a capital market to support the development of science and technology innovation enterprises. As of March, there were 570 companies listed on the Science and Technology Innovation Board, with an average fundraising of 1.596 billion yuan per company. A stable capital market attracts and cultivates innovative enterprises to go public, and a mature capital market helps innovative enterprises improve quality and efficiency.

Third, from the perspective of improving the efficiency of capital utilization, systematic stock market stabilization tools can transmit signals more directly.At present, the operation of my country's stabilization funds is relatively obscure. Apart from the increase in holdings by Huijin Investment and China Securities Finance Corporation, which will cause market interpretation, the remaining funds are only used at the trading end and cannot leverage market confidence through information transmission.

Fourth, only with the Financial Stability Law as a basis can the financial stability guarantee system function normally.The Financial Stability Law is a basic law for preventing financial risks and the cornerstone of the financial stability system. The financial stability guarantee systems in Europe, Germany, and the United States are all built under the guidance of basic laws and regulations such as the FMStG, the ESM Treaty, and the Dodd-Frank Act. The formal establishment of the Financial Stability Law will integrate China's financial guarantee system from top to bottom, and will also formally awaken the Financial Stability Guarantee Fund and improve the path of my country's financial guarantee-type stabilization tools.

Fifth, in the long run, we need to build consensus, work hard to boost the economy, and boost confidence.Development is the fundamental solution to all problems. We should put development as the top priority, work hard on the economy, and launch a new round of economic stimulus plans. Comparing with similar development stages in Japan, South Korea, Taiwan, Argentina, Malaysia and other countries, and the challenges they face, we find that economic transformation still has both positive and negative laws and lessons. We hope that we can make the right choice. As long as we respect economic laws and common sense, we will definitely make the right choice. There is no news in economic history. China's economic potential is huge. As long as we work hard on the economy, the future is bright. Come on, China!

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