Key Takeaways:
China's fiscal-financial coordination is entering a new phase as six major state banks simultaneously roll out expanded loan interest subsidies for small businesses.
China raised the annual SME loan interest subsidy cap to RMB75 million per borrower, up from RMB50 million, as six major state banks simultaneously rolled out the expanded program to spur domestic demand.
"Faster fiscal spending and bond issuance should help government consumption recover from its second-quarter slowdown," said Song Yu, chief China economist at UBS Securities.
China's general public budget expenditure reached 16.29 trillion yuan ($2.4 trillion) in the first seven months, up 1.3 percent year-on-year, while revenue rose 5.8 percent to 14.37 trillion yuan, according to Ministry of Finance data. Local governments had issued 2.4 trillion yuan in new special-purpose bonds by end-July, with more than 2 trillion yuan of bonds and ultra-long-term special treasury bonds still to be deployed in the second half.
The expanded subsidy program, backed by 100 billion yuan in central government funding, has already benefited residents on about 113 million occasions and supported roughly 6.22 million enterprises since its rollout. With the full-year growth target of 4.5 to 5 percent at stake, Vice-Minister of Finance Liao Min said the ministry is working on additional fiscal-financial coordination measures for the second half.
The Ministry of Finance, the People's Bank of China and the National Financial Regulatory Administration jointly issued the notice clarifying the expanded policy, which took effect on Aug. 1. Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank, Bank of Communications and Postal Savings Bank of China all announced implementation details simultaneously.
The maximum loan amount eligible for service-sector business entity interest subsidies was raised from RMB10 million to RMB20 million per borrower per institution annually. For eligible working capital loans granted to small and medium-sized private enterprises since Aug. 1, the central government will provide annualized interest subsidies of 1 percentage point on the principal amount for a period of no more than two years.
The number of participating financial institutions in the two business loan subsidy programs increased to about 400 from about 100, while maximum subsidized loan amounts for businesses and subsidy caps for consumers were also raised.
The policy coordination comes as China's economy showed mixed signals in July, with new growth drivers maintaining momentum even as consumption and investment indicators came under pressure. The consumer goods trade-in program has received 187.5 billion yuan in allocations so far this year, generating about 1.32 trillion yuan in related sales, Liao said.
Shi Yinghua, director of the Chinese Academy of Fiscal Sciences' Research Center for Macroeconomics, said the measures aim to shore up confidence among private investors and boost household consumption. Li Xuhong, vice-president at Beijing National Accounting Institute, said the broader subsidy coverage could magnify the impact of a relatively modest fiscal outlay by drawing on more bank lending.
Su Jian, director of Peking University's National Center for Economic Research, suggested the next step should shift from subsidizing interest payments to strengthening household incomes through direct transfers in categories such as childcare, pensions and medical insurance. Luo Zhiheng, chief economist at Yuekai Securities, called for further refining the trade-in program while broadening consumption-support policies to cover services.
The last time China deployed a similarly broad fiscal-financial coordination package was earlier this year, when the six-policy framework was first introduced with 100 billion yuan in central government funding. The current expansion, however, comes with more than 2 trillion yuan of bond issuance still pending for the second half, giving policymakers room to accelerate spending if growth momentum weakens further.
This article is for informational purposes only and does not constitute investment advice.
