China struggles to disperse cheap loans to businesses in economic slowdown

Stay informed with free updates

Simply sign up to the Chinese economy myFT Digest — delivered directly to your inbox.

Chinese authorities have struggled to disperse $740bn in cheap loans to businesses, as banks raise concerns about credit risk and companies are loath to take on more debt in a slowing economy.

The targeted lending programme has been a critical part of Beijing’s stimulus effort since the coronavirus pandemic and as authorities have tried to kick-start a sagging economy this year. But commercial banks have found it difficult to identify eligible borrowers in the industries prioritised by the government.

Official data shows half of the 14 People’s Bank of China loan programmes, which range in focus from nursing homes to distressed real estate developers, have deployed less than 50 per cent of their quota since they began in 2020. The remaining programmes, or “structural monetary policy instruments”, have disbursed between 62 and 87 per cent of their lending quotas.

The slow take-up underscores the challenges faced by Chinese policymakers to revive the country’s ailing economy, battered by a real estate meltdown and a lack of private sector confidence.

“China’s [financial regulators] are quite aware of the fact that using these targeted measures goes against their attempts to commercialise the banking system and stop interfering in credit allocation,” said Eswar Prasad, an economics professor at Cornell University and the former head of the IMF’s China division.

“But I think they have decided that targeted credit allocation may be the lesser of two evils, with a larger evil being broad monetary stimulus that could raise all sorts of medium-term financial and other risks.”

China already had a long history of wielding targeted loans to achieve policy goals. But authorities increasingly relied on the strategy to support the economy following the outbreak of Covid-19, with the PBoC rolling out more than a dozen short-term, low- or…