Will Chinese subsidy for consumer loan interest help spur more spending?

Beijing has unveiled a year-long plan to subsidise interest on personal consumer loans to spur spending, but analysts say that while it has symbolic importance, its impact might be modest given the small share of total consumption funded by borrowing.

Individuals who take out consumer loans for purchases – including single transactions below 50,000 yuan (US$6,958) and higher amounts for purchases in key sectors such as cars and education – will have part of their interest costs covered by the government, according to the plan released on Tuesday by the Ministry of Finance, the People’s Bank of China and the National Financial Regulatory Administration.

The authorities said the plan aimed to “better leverage fiscal funds to support and guide consumption, lower the cost of consumer credit for households, and help unlock their spending potential”.

“Consumer loans will have only a limited impact on overall consumption in the short term, but the signalling effect is clear, as the subsidised areas are all sectors currently receiving strong policy support and encouragement,” Zhong Linnan, an analyst at GF Securities, said in a note issued on Tuesday.

Zhong said that from June last year to June this year, consumer loans increased by 1.2 trillion yuan, while total retail sales of consumer goods reached 41.3 trillion yuan, meaning new consumer loans accounted for just 2.9 per cent of the total.

Vice-Minister of Finance Liao Min told a news conference in Beijing on Wednesday that the subsidy plan would see “more credit funds channelled precisely into the consumption sector and … while ensuring and improving people’s livelihoods, boost consumption to facilitate economic circulation”.