China’s central bank announced on Monday it would start a fresh round of a swap facility that would channel about US$15 billion into the struggling onshore stock market, after its worst monthly sell-off in a decade dealt a heavy blow to investor confidence and threatened to add new risks to the country’s financial system.

The People’s Bank of China will start the one-year swap on Tuesday. The facility allowed institutional investors to exchange illiquid assets for liquid ones with the central bank to buy stocks, according to an online statement from the central bank.

The bank said 31 institutions, including securities firms and asset management companies, had applied for the programme – which has a combined size of 100 billion yuan (US$15.04 billion) – adding that the facility would “support the healthy development of our capital markets”.

The market had anticipated the move after local media reported on the weekend that the central bank would convene a meeting with other financial regulators and institutional investors to discuss options to support equities.

The CSI 300 Index, which tracks major Chinese firms listed in both Shanghai and Shenzhen, rose 0.8 per cent on Monday, rebounding from its worst monthly performance in a decade in October, while the chip-heavy Star 50 gauge rallied more than 3 per cent.

Beijing appears increasingly uncomfortable allowing the equity rout to develop its own momentumStephen Innes, SPI Asset Management“The message is fairly straightforward. Beijing appears increasingly uncomfortable allowing the equity rout to develop its own momentum, particularly when the AI trade is already under pressure globally,” said Stephen Innes, a managing partner at SPI Asset Management.

“Whether another round of officially encouraged buying can restore genuine investor confidence is another matter, but when China’s national team starts assembling around the market, the shorts would be wise to keep one eye on the policy headlines and the other on the exit.”The relaunch of the swap facility marked an escalation of the state intervention in Chinese stocks, which are ranked among the worst-performing key markets globally this year. Goldman Sachs estimated that China’s state buyers, dubbed “the national team” by investors, may have bought at least 170 billion yuan of exchange-traded funds tied to key equity gauges last month.

The CSI 300 slumped 8.5 per cent in October, logging its steepest monthly decline since January 2016 and taking its annual loss to 13 per cent, as domestic demand continued to languish amid a poor jobs market and as woes in the property market lingered. A rotation out of tech stocks in the US also fuelled the rout in the Chinese market, with AI bets bearing the brunt of sell-offs after rising to record highs.

The swap programme is part of a broad package unveiled by the central bank in 2024 to prop up the stock market with fresh liquidity, alongside a 300 billion yuan relending scheme that funds buy-backs by listed companies and key shareholders. In the previous two rounds of the swap facility, the central bank injected about 100 billion yuan into the stock market.

In signs that state buying may further gather pace, China Reform Holdings and China Chengtong Holdings Group, the government-backed investment entities consisting of the national team, might get as much as 100 billion yuan each in relending for equity repurchases from a big state bank, according to local media reports.

“The downside risk may be contained, but that doesn’t mean the market has already hit the absolute bottom,” said Wei Jixing, an analyst at Kaiyuan Securities. “A short-term rebound may take place any time, but that cannot extrapolate a trend reversal. A restart of the AI trade requires a strengthening of the narrative and a further fallback in crowding.”The tumult in US stocks may complicate China’s efforts to stabilise its own, with the Nasdaq-100 Index tumbling 3.5 per cent on Friday to technically enter a correction after a 10 per cent drop from an all-time high.

Investors are fretting over the returns on US$750 billion in spending on AI infrastructure buildouts this year, as signs emerged that the enormous capital expenditures were eating into hyperscalers’ profits from existing businesses and outpacing the generation of cash flows.

Bank of America and Macquarie said that China’s state intervention might only put a floor under stocks, rather than drive a substantial rally, as the sustainability of equity gains depended on the strength of corporate earnings and a recovery in domestic demand.