Looming specter of deflation prompts China to subsidize consumer loans
In a bid to counter deflationary pressures and stimulate economic growth, the Chinese government has announced a plan to subsidize consumer loans. This move aims to lower the effective borrowing costs for consumers on loans used specifically for consumption purposes, thereby encouraging more spending on goods and services.
The key details of this plan include a subsidy of 1 percentage point on the annual interest rate for eligible consumer loans, capped at 50% of the loan’s contractual interest rate. The subsidy applies to personal loans verified to be used for actual consumption, with single transactions capped at 50,000 yuan (about $7,000), but higher transactions in key consumption sectors such as automobiles, education, elderly care, culture, and tourism are also covered with the subsidy capped accordingly. The subsidy period is from September 1, 2025, to August 31, 2026, with the central government covering 90% of the subsidy cost and local governments bearing 10%.
The policy targets smaller consumer loans to avoid pressure on bank profits and financial stability, while stimulating spending where it is more essential to boosting the economy. Additionally, a similar subsidy scheme is being applied to service sector businesses in areas like hospitality, health care, tourism, and cultural industries, reducing their financing costs to support employment and consumption growth.
By lowering loan interest expenses, the subsidy makes consumer credit more affordable, encouraging individuals to spend rather than save, which helps alleviate deflationary pressures caused by weak consumer demand. Supporting service industries aims to stabilize employment, which further underpins household income and spending capacity.
Liao Min, vice-minister of finance, mentioned plans to consider extending the duration of the one-year subsidies and expanding the number of eligible sectors. Chinese policymakers last year pivoted away from investment-driven economic stimulus towards trying to boost consumption, and this latest move is a testament to that shift.
Chinese equities rallied on Wednesday, with the benchmark CSI 300 index of Shanghai- and Shenzhen-listed stocks rising 0.9% and Hong Kong's Hang Seng index gaining 1.9%. However, economists have stated that the loan subsidies to the service sector would help increase demand, but the core challenge remains turning around household confidence.
Lynn Song, chief China economist at ING, described the impact of the loan subsidy scheme as "positive but somewhat limited." Under an "existing 'trade-in' scheme", Chinese buyers can receive subsidized prices when upgrading old goods such as smartphones, air conditioners, and rice cookers for newer models. Supporting the development of service consumption is beneficial for stabilizing and expanding employment. The plan includes subsidizing interest rates on consumer loans up to Rmb50,000 ($7,000).
In conclusion, the subsidy is a targeted fiscal measure designed to directly unlock household spending potential, increase consumption, and thereby support China's broader goals of stabilizing and expanding domestic demand amid persistent deflationary risks.
- This subsidy plan on consumer loans by the Chinese government is part of an endeavor to stimulate the economy, specifically by encouraging more spending through lower effective borrowing costs for loans used for consumption.
- The policy covers various sectors such as automobiles, education, elderly care, culture, tourism, and service-sector businesses like hospitality, health care, and the cultural industries, intending to support employment and consumption growth.
- By reducing the burden of loan interest expenses, individuals might be motivated to spend rather than save, assisting in alleviating deflationary pressures caused by weak consumer demand.
- Economists acknowledge that the loan subsidies to the service sector will boost demand, but maintaining and increasing household confidence remains a core challenge in reaching the broader goal of stabilizing and expanding domestic demand.
