Policy Developmental Financial Instruments Rise to the Fore in China as Stimulus Tools

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Chinese authorities have made increasing use of policy developmental financial instruments (政策性开发性金融工具) since the start of 2022, as part of efforts to stabilise the economy amidst Beijing’s staunch commitment to zero-Covid and heightened geopolitical tensions.

The instruments involve China’s big three policy banks playing a leading role by establishing infrastructure investment funds, with commercial banks subsequently providing ancillary financing support..

On 29 June the State Council announced that policy developmental financial instruments would play a key role in supporting the development of major infrastructure projects.

By the end of July two of the big three policy banks – China Development Bank (CDB) and the Agricultural Development Bank of China (ADBC), had both established their own infrastructure fund companies and completed initial rounds of investment.

On 24 August the State Council announced that it would add a quota of 300 billion yuan to the initial round of 300 billion yuan allocated to projects via policy development financial instruments.

As of the end of the third quarter, CDB had made a total of 360 billion yuan via its infrastructure investment fund to support more than 800 projects. As of 12 October ADBC’s infrastructure investment fund had completed investments worth 245.9 billion yuan to support 1677 infrastructure projects, involving total project investments of close to 3 trillion yuan.

Commercial banks have played a complementary role, with the launch of ancillary financing operations. China Construction Bank (CCB) has established “multi-tier sales matching mechanisms” to provide preferential pricing and “green channels” for projects that the policy banks have invested in via their infrastructure investment funds.

Bank of China (BOC) has also supported the infrastructure investments of the big policy banks. As of mid-September it had approved 250 billion yuan in financing support for the policy banks’ infrastructure investment funds, of which nearly 7.5 billion yuan has already been allocated to projects in 17 provinces, covering areas including highways, railways airports, industrial parks and renewable energy.

“Policy development financing instruments have been rapidly implemented, and can effectively resolve the difficulty of obtaining funds for major infrastructure projects,” said Wang Qing (王青), chief macro-analyst with Golden Credit Ratings, to Securities Daily. “They spur commercial banks to provide ancillary financing, and play a counter-cynical adjustment role during key periods for infrastructure investment.”

Policy development financial instruments are expected to continue to play a key role in stimulus efforts over the near-term, particularly while Beijing remains committed to a zero-Covid policy.

The Chinese central bank’s monetary policy committee said that it would “make effective use of policy developmental financial instruments and focus on support for infrastructure development” at its Q3 regular meeting convened on 23 September.

The Q4 economic stabilisation work progress meeting (稳经济大盘四季度工作推进会议) convened on 28 September also called for effective use of policy developmental financial instruments, and accelerated usage of funds for infrastructure project development.

“To a considerable extent, this sends the signal that macro-economic policy focus on both stabilisation of growth and risk control, while also indicating that there is further diversification of the policy tools to support infrastructure investment,” Wang Qing said.

According to Wang the phase-based use of policy developmental financial instruments will help to control any rebounds in hidden debts of China’s local governments and associated risk.

“In addition to local government special bonds, they have provided a new source of funds for infrastructure investment in the second half, ensuring that counter-cynical adjustments are vigorous and put in place promptly.”