China's Central Bank Establishes Bond Swap Facility for Large Redemptions

The People's Bank of China (PBOC) has decided to establish a bond-market swap facility to address large redemptions at nonbank investment firms when stress threatens China's bond market.

The Bond Market NBFI Swap Facility (BNSF) is intended for episodes in which asset managers face widespread liquidity strain and the bond market comes under systemic pressure. Its purpose is to help maintain bond-market stability during such episodes.

Systemically significant bank wealth management subsidiaries and managers of publicly offered funds would be eligible, along with their parent banks or securities firms. They could borrow central bank bills from the PBOC and use them to raise cash through repurchase agreements, known as repos.

The proceeds would finance purchases of eligible bonds or fund units from their own publicly offered products facing redemptions. Participants would pledge the purchased assets to the PBOC and must continue to meet financial-market prudential requirements.

The new decision names the facility and specifies its financing mechanism.