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Trade war or not, China’s boost for its private sector is welcome

34 0 0
31.01.2019

While the US-China trade war has yet to be resolved, Beijing is pumping iron to make sure the domestic economy can achieve gross domestic product growth of around 6.5 per cent this year. Keep your eyes on the private sector and infrastructure investments.

China’s private sector is being given a long-awaited shot in the arm. The authorities have asked banks to allocate half of their new loans to private businesses by 2021. This addresses Chinese businesspeople’s long-standing gripe that they are unable to get financing from mainstream banks, as state-controlled commercial banks largely serve state-owned enterprises and local governments.

Private businesses have had to resort to non-bank institutions for funding – the so-called “shadow banks” – and many have no option but to use high-interest short-term funds to finance long-term commitments. Worse still, these sources of funding began to dry up with the authorities’ curbs on shadow banking over the past 30 months.

Regulators had to find aggressive ways to fix China’s runaway credit boom that began in 2008. They capped credit expansion as a percentage of GDP by stopping off-balance-sheet lending, which also affected the finances of SOEs and local governments.

The build-up of debt not only put public and private institutions at risk but also became a threat to China’s financial stability, making it necessary to rein in shadow lending. The Chinese leadership is now confident its deleveraging measures have worked and the country’s overall debt-to-GDP ratio, which has stabilised at around 250 per cent, is........

© South China Morning Post