MoF ponies up for industrial upgrading
The central government will subsidize loans used to fund industrial upgrading.
Some context: In March, the State Council published an action plan to encourage firms to update old plants and industrial equipment.
- To fund those purchases, the central bank (PBoC) created an RMB 300 billion relending facility.
- The facility extends cheap credit to banks that finance industrial upgrading.
On Wednesday, the finance ministry (MoF) said it will subsidize interest payments on loans funded by the relending facility.
- The subsidy will reduce borrowing costs for firms by one percentage point, and is expected to cost the MoF RMB 1 billion.
The statement didn’t explain how the subsidy works, but we assume it’s similar to a program deployed during the pandemic.
- In 2020, the PBoC launched an RMB 300 billion relending facility to support firms involved in pandemic control. Banks loaned the funds at an average interest rate of 2.5%, well below market rates.
- The MoF then paid 50% of interest payments on behalf of borrowers, meaning the average interest rate paid by firms was only 1.25%.
The PBoC currently charges banks 1.75% for funds under its relending facilities.
Our question: With domestic demand still weak, are cheaper borrowing costs enough to convince firms to splash out on new investments?