China has injected nearly $100 billion from its foreign exchange reserves into two policy banks, which lend based on government directives, to help spur the country's sluggish economy, state media reported on Wednesday.
Shanghai stocks closed up 1.23% on Wednesday, erasing a more than 5% plunge in morning trade, on expectations of fresh government support for the market, dealers said. The benchmark Shanghai Composite Index fell as much as 5.06% and rose up to 1.69% during the day after a more than 6% drop on Tuesday, the biggest fall in three weeks. The Shenzhen Composite Index, which tracks stocks on China's second exchange, rose 2.19%, AFP reported.
The central bank on Tuesday completed putting $48 billion into the China Development Bank and $45 billion into the Export-Import Bank of China, the official Xinhua news agency reported. The move was to enhance their capital base and support the economy, it said.
"The injection suggests the central bank is trying to guide funds to go to the real economy, like exports and infrastructure construction," China economist at Barclays Capital, Wang Shengzu, told AFP.
Separately, Bloomberg reported China Development Bank and another policy bank, the Agricultural Development Bank of China, plan to issue one trillion yuan (S$230 billion) worth of bonds to fund construction projects to boost the economy.
China's economy, the world's second-largest, expanded 7.4% last year, its weakest since 1990, and has slowed further this year, growing 7% in each of the first two quarters. The government has set a target of around 7% growth for all of 2015.
In a bid to stimulate activity, China has cut interest rates four times since November and has also lowered the reserve requirement ratio–the amount of money banks must put aside.
"The funds released from earlier monetary loosening didn't go to the real economy. Instead, most of it went to the financial institutions and the stock market," Wang added.
China's foreign exchange holdings are the world's largest, though they fell to $3.69 trillion at the end of June, down from $3.73 trillion at the end of March.
