Interest subsidy policy aims to boost consumption

China has unveiled interest subsidy policies on certain loans to ease the financial burdens of both individuals and businesses, as part of the country's broader push to boost consumption, analysts said.

The interest subsidies, earmarked from fiscal funds, will be provided to personal consumer loans and business loans in the services sector, according a State Council executive meeting on July 31.

Zeng Gang, director of Shanghai Institution for Finance and Development, said that banks are now encouraged to offer reasonable loan terms for major consumer expenditures like car purchases, home appliance upgrades, and cultural-tourism activities, with fiscal interest subsidies poised to further reduce borrowing costs and spur spending appetite.

For market players in service sector, especially small and medium-sized ones in catering, housekeeping, and childcare services, the interest subsidies will help expand their operations and increase service provision, Zeng added.

At the start of this year, consumer loans underwent a round of rate competition. By late March, consumer loans with annual interest rates below 3 percent were halted, leading to a decline in subsequent customer applications.

Business loans maintained steady growth, with financial data for the first half of the year showing household loans increased by 1.17 trillion yuan ($162.8 billion).Within this total, individual business loans surged by 923.9 billion yuan, accounting for a 79 percent share.

Though the subsidy rates, the scope of eligible loan purposes and other specifics remain under wraps, analysts said reductions in borrowing costs could provide a boost to consumption.

Coordinated fiscal and financial measures are not unprecedented. This year's rebound in consumption driven by the consumer goods trade-in program has been underpinned by support from ultra-long-term special treasury bonds, said Lou Feipeng, a researcher at the Postal Savings Bank of China.

"The core advantage of interest subsidy policies lies in their leverage effect, mobilizing larger-scale private capital into the consumer sector with minimal public investment," Lou added.

One day before the State Council executive meeting, the Political Bureau of the Communist Party of China Central Committee held a tone-setting meeting calling for efforts to deepen the implementation of consumption-boosting initiatives, expanding goods consumption while simultaneously fostering new growth drivers in the service sector.

"We anticipate a further ramping-up of consumption-boosting measures in the second half of the year, building on the steps already taken to stimulate domestic demand," said Wang Qing, chief macroeconomic analyst at Golden Credit Rating International.

"Raising the subsidy levels for trade-ins, issuing consumption vouchers nationwide, and extending incentives to cover service sectors like tourism and catering — these are all policy options on the table," Wang added.