PBOC Creates Bond Market NBFI Swap Facility: A Plain-English Guide to the New Liquidity Backstop

The People's Bank of China announced on October 26 that it has decided to establish a Bond Market NBFI Large Redemption Swap Facility (BNSF). In specific scenarios where asset management institutions face herd liquidity risk and the bond market comes under systemic pressure, the facility supports systemically important bank wealth management subsidiaries and public fund managers (or their parent banks or securities parents) in borrowing central bank bills from the PBOC for repo financing, so that they can buy eligible bonds or product shares of their own public funds that have suffered redemptions and pledge them to the PBOC. Participating institutions must continuously meet prudential financial market management requirements and uphold market discipline.

Earlier, PBOC Governor Pan Gongsheng said at the Financial Street Forum that the central bank, together with the National Financial Regulatory Administration and the China Securities Regulatory Commission, would set up a liquidity support tool for large redemptions at non-bank institutions, with the aim of establishing a bond market stabilisation mechanism to be activated in specific scenarios where asset management institutions face herd liquidity risk and the bond market falls into a redemption-and-fire-sale negative loop.

Why the new tool: preventing concentrated redemptions from triggering risk and shoring up the financial safety net

As financial markets develop, asset management institutions such as bank wealth management units and public funds play an ever-greater role in household wealth management and social financing. At end-2025, outstanding bank wealth management products reached 33 trillion yuan and public fund net asset value reached 38 trillion yuan. Asset management institutions have become major participants in the bond market, and their liquidity conditions are more closely tied to market trading and asset pricing, while their interconnection with market institutions and risk contagion have continued to rise. Zhang Jun, chief economist at China Galaxy Securities, said that against the backdrop of changes in the financial structure, improving the emergency liquidity support mechanism for non-bank institutions can further enhance the central bank's ability to safeguard financial stability.

Under normal market conditions, redemptions of asset management products can usually be met through cash reserves, maturing assets and ordinary market trading. But when many institutions face heavy redemption pressure at the same time, concentrated bond selling can depress market prices and further affect product net asset values and investor expectations, creating a loop in which redemptions and fire sales reinforce each other. The wealth management redemption wave at the end of 2022 is a representative example.

Zhang Jun added that the purpose of the facility is to break the redemption-and-fire-sale loop and hold the bottom line of no systemic risk when the bond market swings sharply. The tool is used in specific scenarios, not as routine liquidity provision, and is confined to extreme situations of large bond market swings and herd liquidity risk at asset management institutions. Day-to-day liquidity needs are mainly met by institutions through their own management and market financing; when the market is under stress and normal financing and trading functions are materially impaired, the facility can provide support and buy time for institutions to adjust assets in an orderly way and for the market to return to normal. For credit risk arising in ordinary circumstances from deterioration in an institution's own credit standing or defaults on credit bonds, matters are still handled properly on market-based and law-based principles, which differs from the facility's function of addressing liquidity risk. Such an arrangement effectively links routine management with emergency protection, helps stabilise market expectations and preserves institutions' incentive to manage liquidity risk on their own.

How it works: the swap-based approach, market-based principles and support for industry self-rescue

The central bank previously created two tools supporting the capital market, one of which — the securities, fund and insurance company swap facility — strengthened institutions' financing and equity accumulation capacity through asset swaps, lifted market confidence and initially established a mechanism to enhance the internal stability of the capital market. The large-redemption liquidity support tool draws on that practice: it supports asset management NBFIs in borrowing central bank bills from the PBOC and, after raising funds in the market, subscribing to eligible assets of products hit by large redemptions, thereby breaking the negative loop from redemptions to forced selling. This arrangement complies with the PBOC Law's requirement that the central bank may not lend directly to non-bank institutions, while effectively delivering emergency liquidity support to NBFIs through an appropriate channel. Together with the equity market swap facility, it builds a non-bank emergency liquidity support mechanism covering both the stock and bond markets.

It is also understood that the relationship between the central bank and participating institutions is a creditor-debtor relationship based on lending. Institutional legal entities provide eligible bonds and other collateral, bear the actual profit and loss, take account of their own asset conditions, financing costs and repayment capacity, and incorporate use of the facility into overall risk management. Wang Yifeng, deputy director of the Everbright Securities Research Institute, said that as managers of wealth management and fund products (or their parent banks or parents), institutional legal entities buying their own products in an emergency is similar to a manager co-investing, which aligns company interests with those of product investors, represents the company's recognition of the assets' value at the time, and helps curb the self-reinforcing cycle of selling and redemption. The scope of the facility also covers asset managers' parent banks and parents, mainly because these parents are better capitalised and more resilient; during the 2022 wealth management redemption wave, parent banks also supported their wealth management subsidiaries.

Wang Yifeng added that purchases of their own products will still follow fair pricing and product net asset values will still genuinely reflect investment risk. This is not rigid repayment for specific products and helps consolidate the industry's move to net asset value pricing and the reform achievement of breaking implicit guarantees.

Emergency support combined with prudential constraints to guard against moral hazard and the illusion of a backstop

The announcement also stated that participating institutions must continuously meet prudential financial market management requirements and uphold market discipline. Industry experts said these prudential requirements are not a one-off entry threshold but a continuing constraint throughout use of the facility. Institutions wishing to participate must demonstrate sound operation in normal times and must maintain it after receiving support, ensuring prudential regulatory indicators — which may include leverage ratios and duration — remain compliant. International experience reflects a similar approach.

It is understood that the mechanism is designed to rescue the market rather than individual institutions; institutions that run into trouble because of their own imprudent operation will not be eligible for support. The facility incorporates a sound mechanism, and in implementation the relevant transactions will strictly follow fair pricing and risk isolation principles, so that losses from excessive speculation by institutions are not transferred to other parties. If an institution has operated imprudently, it is not eligible to participate when an emergency arises. Overall, while promptly easing liquidity shocks, the facility also stresses maintaining market discipline and avoiding any illusion of a blanket backstop.

(Source: CCTV Finance)