Borrowing Costs for Chinese Firms: A Major Barrier to Private Investment, Says NDRC

BEIJING – Borrowing costs and access to funding are significant barriers to private investment in China, a senior official from the country’s leading economic planning agency stated on Monday. This statement follows a record decline in private investment growth.

A surge in government spending and a housing boom propelled China’s economy to grow by 6.7 percent in the second quarter. However, the dramatic drop in private investment raises concerns about the economy’s overall momentum, prompting worries among policymakers.

Investment growth by private firms, which constitute over 60 percent of China’s total investment, has reached an unprecedented low in the first half of the year as businesses scale back amidst a sluggish economic forecast and declining exports.

Zhang Yong, deputy chair of the National Development Reform Commission (NDRC), indicated that many private sector executives are currently taking a "wait and see" approach to investment. Xu Kunlin, who heads the NDRC’s investment office, added that difficulties in securing financing are now the most significant challenges facing businesses.

"Loan tenors are relatively long, and costs are quite high. Many companies struggle to roll over existing loans, forcing them to seek alternative funding sources that often come with even higher costs, leading to numerous issues," Xu explained.

Zhang suggested that China should enhance government investment but emphasized that it should not compete with private sector investment, as banks often favor state-owned enterprises due to their perceived security. According to analysts from an investment bank, private firms faced an average of 6 percentage points higher interest rates on bank loans compared to the public sector in the second quarter.

The increasing dependence on state enterprises for economic growth is also making investment in China less effective. Research indicates that from 2003 to 2008, when annual growth averaged over 11 percent, one yuan of additional credit resulted in one yuan of GDP growth. In contrast, this year it takes six yuan to generate one yuan of growth, marking a significant decline in efficiency, even more so than during the U.S. housing bubble that led to the global crisis.

Sheng Songcheng, director of the Survey and Statistics Department at the People’s Bank of China, has remarked that the country may currently be in a "liquidity trap," where increased money supply is largely absorbed by firms that do not reinvest the funds. While monetary policy can be effective, it has its limitations and must be coordinated with proactive fiscal measures. Sheng proposed that China has the capacity to boost its fiscal deficit ratio to between 4 and 5 percent to more effectively stimulate the economy.

Recently, China’s cabinet revealed specific measures designed to enhance investment and economic growth, including expanding financing avenues for businesses and creating new equity funds.