What are the political banks used by China to stimulate the economy?

Placeholder while loading article actions

China’s specialized policy banks were designed to help the government achieve its long-term goals in areas where for-profit banks might be reluctant to lend. Beijing can also call on it when there is a pressing short-term need to revive the economy. This year, as China tries to pull itself out of an area of ​​Covid-induced economic weakness, the government is once again calling them to “national service”.

These are the China Development Bank, the China Export-Import Bank and the China Agricultural Development Bank. All three were established in 1994 to provide targeted loans to areas deemed by the authorities to be in need of assistance. Each is funded by the state and under the direct direction of the national cabinet. Their main lending areas are:

• CBD: infrastructure, urbanization, industry upgrading and equipment manufacturing, poverty reduction and development

• Eximbank: foreign trade and cross-border investment, overseas “Belt and Road” infrastructure projects, helping small and medium enterprises to “go global”

• ADBC: Fund stockpiling of key agricultural commodities, rural infrastructure, slum upgrading, agricultural enterprises

The financing they have extended to developing countries has also made China the world’s largest official creditor over the past decade.

2. How are they used to support the economy?

In early June, Beijing asked political banks to provide $120 billion in funding for infrastructure projects as part of broader efforts to support businesses affected by Covid. As China strives to meet its economic growth target of around 5.5% – which is already well below last year’s rate of 8.1% – more such measures are expected. Following an economic downturn beginning in 2014, the CBD accelerated funding for a “slum upgrading” campaign, which stabilized the economy and fueled a property boom.

3. Where does the money come from?

Unlike commercial lenders who compete for deposits from the public, strategic banks primarily obtain their funds by issuing bonds with higher credit ratings than commercial banks. These bonds are highly desirable as they can be used as collateral to borrow from China’s central bank, thereby keeping borrowing costs low for strategic banks. Some of the financing for the slum projects was allocated to the CDB directly by the central bank under what it called the Additional Pledged Loan, a new tool that has become an integral part of China’s monetary policy.

4. Don’t we have the “Big Four” banks for that?

Although Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Agricultural Bank of China Ltd., Bank of China Ltd. may also be asked to perform a national remittance service in certain areas, they are essentially commercial for profit. banks which can be picky in the selection of borrowers and projects. Political lenders, however, operate on a not-for-profit basis and are often recruited to pour cheap funds into projects that are financially less attractive but important to the long-term development of the economy.

5. Are they unique to China?

Yes and no. There are also equivalents in more developed economies, such as the Export-Import Bank of the United States and Germany’s Kreditanstalt fuer Wiederaufbau, as well as regional banks like the Asian Development Bank. But China’s strategic banks are much larger in scale and play a bigger role in the country’s more state-run economy. However, China lacks tailored rules for its political banks, which are regulated like commercial banks.

More stories like this are available at bloomberg.com


Comments are closed.