Interest rates subsidized to boost spending

China has introduced a subsidy on loan interest rates for consumers and commercial service providers, in Beijing's latest push to boost consumption and enhance its economic resilience amid external uncertainties.

These programs offer an annual interest subsidy of 1 percentage point on eligible loans, running from Sept 1 to Aug 31 next year, covering both personal loans for consumption and business loans in the service industry.

It means that if a loan is taken out at 4 percent, the borrower will only have to repay 3 percent.

"This is the first time the central government has implemented such an interest subsidy policy in the consumer lending space," said Liao Min, vice-minister of finance. "It's a powerful leveraging effect, combining fiscal funds and financial tools to provide direct benefits to the people."

The policy can be seen as the second in a "one-two punch" when combined with existing trade-in subsidies, further incentivizing the public to go out and spend.

For consumers, the subsidies apply to the portion of loans used for consumption purposes, covering both single transactions under 50,000 yuan ($7,000) and priority sector purchases of 50,000 yuan or more on automobiles, elderly care and child care, education, tourism, home furnishings and healthcare.

For service sector businesses in catering, accommodation, healthcare, elderly care, child care, housekeeping, culture and entertainment, tourism and sports are eligible for the subsidies should their loan be used for improving consumption infrastructure or service supply capacity.

Yu Hong, director of the financial department at the Ministry of Finance, said the key focus in the policy design is ensuring widespread reach and minimal hassle for applicants. "The goal is to make it as easy as possible for people to save money and enjoy the policy support," Yu said.

The interest subsidy rate for both consumers and businesses is set at 1 percentage point annually, with the central government covering 90 percent of the subsidy funds and provincial-level governments contributing the remaining 10 percent.

These interest subsidy programs, which can reduce borrowers' annual interest expenditure by 1,000 to 3,000 yuan for individuals and up to 10,000 yuan for service providers, can be deemed as a "supportive" rather than "strongly stimulative" measure, said Dong Ximiao, chief researcher at Merchants Union Consumer Finance.

"This calibrated approach allows the government to strike a balance between supporting consumption and maintaining financial stability, leaving room for future policy adjustments if needed," Dong said.

According to calculations by the Finance Ministry, for every yuan the State spends on subsidizing loan interest, it aims to mobilize up to 100 yuan in fresh credit directed toward consumer spending and services.

As of the end of June, the nationwide household consumption loan balance, excluding personal housing loans, was 21.2 trillion yuan. The loan balance for key service consumption sectors such as hospitality, entertainment and education was 2.8 trillion yuan.

The two interest subsidy programs are designed to empower consumers and stimulate consumption from both demand and supply sides.

When the policies expire on Aug 31 next year, the government will conduct a comprehensive evaluation of their effectiveness and consider an extension, expanding the scope of eligible sectors, and including more financial institutions.

China's retail sales of consumer goods, according to the National Bureau of Statistics, increased by 3.7 percent year-on-year in July, a slowdown from June's 4.8 percent rise. This indicates that the government's efforts to stimulate domestic demand need further reinforcement to sustain growth.

Luo Zhiheng, chief economist at Yuekai Securities, said that as the effectiveness of trade-in programs for boosting durable goods consumption, which started last year, is likely to taper off over time, policymakers are turning their attention to bolstering services consumption as a means of strengthening the economy's resilience and achieving growth targets.

In the first half of this year, China's total retail sales of consumer goods increased by 5 percent year-on-year, while retail sales of services grew by 5.3 percent, data from the bureau showed.

The Political Bureau of the Communist Party of China Central Committee held a tone-setting meeting in late July that emphasized the need to unlock the full potential of domestic demand by fostering new growth drivers in services consumption.

International experience suggests that as a country's per capita GDP reaches around $15,000, its consumption structure tends to shift rapidly from being dominated by goods to that of services.

China's per capita GDP has surpassed $13,000, and the country's services consumption is entering a phase of rapid growth, with robust and sustained demand emerging in areas like education, healthcare, tourism and elderly care, experts said.

Wang Qing, chief macroeconomic analyst at Golden Credit Rating International, said Chinese consumers are increasingly spending on services, including healthcare, education, fitness, beauty and tourism, moving away from a traditional focus on physical products.

The new interest subsidy programs are primarily focused on supporting key service industries like healthcare, tourism and culture, to align with the evolving needs and preferences of Chinese consumers, who are increasingly prioritizing quality-of-life and leisure-related expenditures, Wang said.

In its latest quarterly monetary policy report, the People's Bank of China, the country's central bank, identified the services sector as an area with significant growth potential for consumption, but also pointed to the persistent challenge of insufficient supply in high-demand services.

The supply of services in critical areas such as early childhood education and elderly care has not kept pace with the rising needs of Chinese consumers. China's enrollment rate for children under 3 years old in child care facilities is less than 10 percent. That is far below the Organisation for Economic Co-operation and Development country average of around 36 percent. Similarly, China's provision of elderly care beds, at 27.7 per 1,000 elderly people, also lags behind many OECD nations, the report said.

The quality of service provision also remains a concern, with an oversupply of standardized, low-end offerings and a shortage of specialized, personalized services, said Luo from Yuekai Securities.

"While the number of domestic service enterprises is high, many are focused on basic cleaning and maintenance, struggling to meet the growing demand for more specialized services like nutritional meals, healthcare and family education," Luo added.

Earlier this year, the People's Bank of China introduced a 500 billion yuan re-lending facility to encourage financial institutions to increase their support for high-quality service provision in sectors such as hospitality, tourism, culture, entertainment, education and elderly care.

Strengthening the coordination between monetary and fiscal policies, as well as aligning various measures to boost consumption, will be crucial in amplifying the impact and effectiveness of China's efforts to stimulate domestic demand, Luo said.

wangkeju@chinadaily.com.cn