Was big-ticket credit expansion a good way to prime the pump of the world's second largest economy? That depends who the borrowers are. If we're to believe Beijing, the Chinese government aims to support flagging private businesses, bruised by lower consumer spending and the Sino-U.S. trade war.
In October 2018, Chinese President Xi Jinping offered some words of encouragement for the private sector in an open letter published in state media. “Any words or acts to negate or weaken private economy are wrong,” Xi wrote.
“It is always a policy of the Central Committee of the Communist Party to support private business development, and this will be unwavering."
Data from China's Central Bank show that household loans fell 46% of new loans in 2018 from 53% a year earlier, while corporate loans inched up to 51% from 50% in 2017. Typically, Chinese banks prefer lending to state-owned companies, whom they view as having a low default risk. Private firms have a harder time getting bank loans. That's unfortunate given the private sector accounts for the vast majority of China's productivity and employment opportunities. In contrast, SOEs are often inefficient.
With that in mind, there's a risk that this credit surge will end up funding SOEs working on white elephant infrastructure projects at the behest of local governments. Such wasteful spending has saddled China with empty "ghost cities" and increasingly, phantom airports. A whopping 75% of Chinese airports are loss-making, The Wall Street Journal noted in a Feb. 2017 report. Yu Zhanfu, a consultant at Roland Berger Strategy Consultants, told the Journal that provincial airports are frequently "built without any realistic expectation of demand."
Meanwhile, even if some private firms are capitalizing on lower borrowing costs to refinance, their earnings have taken a hit amidst the economic slowdown. Thus, they're hesitant to make the type of productive investments the economy needs to get back on track, analysts say.