China Launches Small-Scale Summer Stimulus, Takes Loan-Based Approach to Growth

By Tim Donovan

China’s current economic slowdown has raised serious questions for many companies about how their businesses will be affected and about the direction of the Chinese economy. Although many Chinese business leaders and local governments have called for a large-scale, broad-brush stimulus, the central government appears to be taking a different approach, focusing its efforts on guiding the economy through targeted bank-led lending.

Such a strategy represents a different tack from the massive fiscal stimulus that took place in 2008. That year, China’s State Council approved a $586 billion package, channeling funds primarily through the National Development and Reform Commission (NDRC) and other government ministries. Recent stimulus efforts, however, have focused on private investment and on state-owned banks, which have made smaller, targeted loans to provincial and city-level governments throughout the summer.

Chinese leadership aims to reduce the role of government direct investment, boost other channels for economic stimulus

Chinese leaders indicated early this year that they would not depend on “government direct investment for economic growth.” In a speech broadcast to officials around China in May, Premier Li Keqiang said that China should focus instead on “market mechanisms” to revitalize the economy—thus pointing toward bank lending and private investment. A week after his remarks, Chinese and international media reported that Li had rejected a $6.5 trillion urbanization plan crafted by the NDRC that was purported to include direct government spending, and had indefinitely postponed a proposed urbanization conference to discuss the plan.  

Instead of direct government spending, the Chinese government appears to be seeking other policies and channels to boost the economy. On July 24, Li encouraged private investors to play a more active role in the country’s railway development plans, saying that such an ambitious urbanization project could only be fulfilled with the help of multiple investment channels. In July, it announced that it would eliminate taxes on small businesses and reduce costs for exporters.

Bank loans indicate a more targeted strategy for local growth

The most important tool in this round of economic response, however, has been targeted bank lending. Such disbursements have been limited in comparison with past stimulus programs, and the ways in which funding has been allocated have been more strategic and precise.

As reported by the media in August, the Chinese leadership’s current approach has directed stimulus into certain provinces and cities through state-owned banks. On August 6, for example, the Agricultural Bank of China signed a RMB 250 billion ($40.8 billion) loan with the Shanghai city government. Analysts have speculated that the loan will be used to support the city’s Disneyland project and to finance the pilot free trade zone (FTZ) that was approved for the city on July 3. The size of the loan represents 12.5 percent of Shanghai’s GDP for 2012. 

Following this, the China Development Bank (CDB)—which reports directly to the State Council—entered into memoranda of understanding with Hebei, Jiangsu, and Qinghai provinces on August 9. According to the agreement, all three provinces will receive infrastructure loans directly from CDB. The actual amounts of the loans have not been disclosed. But according to Chinese media, Hebei will use the loan money to restructure decrepit public housing, initiate a slum renewal project, and develop a new airport zone. Jiangsu will spend funding on urban infrastructure and regional transportation development. Qinghai will allocate its money toward remote and underdeveloped roads, railways, and waterways.

Opportunities for foreign companies

So far, the new Chinese leadership has shown tolerance for slower growth to address policy corrections. As long as China’s growth does not slide below 7 percent, Li has said that China will not launch a “broad” government stimulus program.

With this condition in mind, business opportunities for foreign companies will depend upon how their sectors tie in to targeted stimulus approaches. Several provinces have already announced they will seek private investment support for infrastructure projects, and key geographic areas, like Hebei, Jiangsu and Qinghai, provide good examples of new opportunities as a result of local implementation. Moreover, with the Chinese government aiming to reduce the overall role of government direct investment in the economy, foreign companies may also find emerging opportunities in areas—such as railway construction—that were formerly under the purview of the broad based 2008 stimulus.