If the stabilization fund is established, what could be the potential scale?

At the press conference of the State Council Information Office on September 24th, when asked about the establishment of a stabilization fund, Pan Gongsheng, the Governor of the People's Bank of China, responded that it is "under study".

A stabilization fund is a special type of market stabilization fund established and managed by the government or specific institutions. It typically intervenes in the market during excessively abnormal fluctuations to actively guide asset prices to return to normal fluctuation ranges.

The primary function of a stabilization fund is to stabilize the market. For example, when the stock market irrationally plunges and investment value becomes prominent, the stabilization fund buys stocks; while during a stock market bubble expansion and speculative trading frenzy, the stabilization fund sells stocks. Stabilization funds are used to prevent drastic price fluctuations, help maintain the economic stability of a country, and reduce the risk of asset price bubbles or financial crises.

Widely Used Overseas

Stabilization funds are widely used in global markets and can be applied to stock markets, government bonds, foreign exchange, commodities, and other markets. Overseas, countries like Japan, South Korea, the United States, etc., have precedents of using stabilization funds to stabilize markets.

According to Dongxing Securities Co., Ltd., Japan has used stabilization funds to boost the market during four stock market downturns in 1964, 1965, 1995, and 2010. In the most recent case in 2010, the Japanese government directly used the central bank to purchase ETFs and stocks through trusts to rescue the market, with a scale of 1 trillion yen that year.

South Korea's stabilization fund has also intervened in the stock market's sharp declines multiple times after its establishment, with four market rescue actions in 1989-1990, 2003, 2008, and 2022. For instance, in 1990 when the South Korean stock market bubble burst, the South Korean government organized securities firms, insurance companies, banks, etc., to collectively contribute 4 trillion Korean won to stabilize the market.

The most recent use of a stabilization fund in the United States occurred in 2008. In September, Lehman Brothers, the fourth-largest investment bank, filed for bankruptcy, Merrill Lynch was forced to be acquired by Bank of America, and insurance giant American International Group (AIG) was on the brink of collapse, leading to the largest single-day drop in the Dow Jones Industrial Average since September 2001.

To prevent further exacerbation of market panic, the Federal Reserve, using its special authority, provided an $85 billion loan to save AIG from bankruptcy. Subsequently, the Federal Reserve, together with the top ten banks in the United States, established a $700 billion rescue fund aimed at providing financial support to institutions facing bankruptcy risks. In October, the Treasury Department implemented a $250 billion capital purchase plan, purchasing preferred stock of banks and financial institutions, successfully stabilizing the entire banking industry. By the end of 2008, the Dow Jones Industrial Average began to rebound from its lows

What could be the size of China's stabilization fund?

CITIC Securities' research report last year indicated that the size of the stabilization fund is generally between 3% and 6% of the total market value.

Haitong Securities also analyzed that the size of China's stabilization fund could reach 3 trillion yuan, benchmarking the 3 trillion yuan foreign capital scale under the circulating market value.

The potential sources of funds for the fund could be the part left after supporting the market in the second half of 2015 or contributions from institutional investors. In addition, the relatively stable stamp duty revenue each year can become an important supplementary fund for the stabilization fund. Referring to the fund amount corresponding to the stamp duty revenue of the securities trading in 22 years, it is close to 300 billion yuan.

Founder Securities stated that, referring to mature overseas markets, the size of the stabilization fund is approximately around 3% of the total market value of stocks. Based on the current total market value of the Shanghai and Shenzhen stock markets, the size of the stabilization fund should be between 2 trillion and 3 trillion yuan