Shorts Beware? China’s Plunge Protection Team Stabilizes Stocks With $15 Billion Swap Rescue Plan

China’s version of the Plunge Protection Team is coming out swinging Monday morning, after the central bank announced earlier today that it would inject a new round of a $15 billion swap facility to rescue stocks from a vicious bear market. 

After markets closed, the People’s Bank of China said it would hold a one-year swap auction Tuesday, with 31 brokerages and funds applying for quotas totaling more than $15 billion. The facility lets financial firms exchange eligible assets for highly liquid central bank assets, increasing their ability to buy equities. 

South China Morning Post said the 31 institutions, including securities firms and asset management companies, applied for the facility, which would allow their trading desks to buy stocks mired in a downturn since summer. 

Yuan Weitao, fund manager at Xi’an-based asset management firm Guofulianhe, was quoted by Bloomberg as saying, “Today’s move provides crucial incremental liquidity at a time when the market lacks fresh capital to absorb selling pressure, helping it stabilize and find a bottom. “

Weitao noted, “Rather than stepping in with large-scale funding after every sharp decline, the authorities and regulators are taking a more measured approach and allowing the market to adjust on its own.”

The measure added stability to the CSI 300 Index, which gained .8%, while the technology-heavy Star 50 climbed more than 3%. The rebound followed an 8.5% October decline in the CSI 300 and a record 12 consecutive weekly losses through Friday that tumbled into a bear market. 

“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, quoted by SCMP. 

Innes said, “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.”

Last week, Bank of America’s Michael Hartnett, BNP Paribas, and Goldman Sachs all pointed to signs of China’s PPT ramping up to save stocks. 

Most notably, Goldman’s Asia desk recently said that “state-backed ‘national team’ ETF buying supported the recovery, with turnover across nine favored ETFs reaching RMB84bn ($12.6bn), after the market entered bear-market territory on Thursday.”

What’s clear in our view is that the downside risk to Chinese stocks may be contained for now, but really, how long will that optimism last when cracks in the AI trade have already materialized in the US? 

“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,” Kaiyuan Securities analyst Wei Jixing said.