.png)
While the rest of the world scrambled to contain the economic fallout of Covid-19, China was already well into pandemic recovery by mid-2020. This rapid rebound can partly be attributed to swift implementation of fiscal stimulus measures like infrastructure spending. However, an often overlooked tool that played a key supporting role was the strategic deployment of Policy Support Loans or PSLs.
PSLs refer to low-interest credit facilities provided by China's central bank and policy banks to propel growth in prioritized industries. They are one of the "policy banks'" primary instruments for implementing the state's industrial plans by ensuring adequate funding access for targeted sectors facing market challenges. Through PSLs, Beijing aims to stabilize employment, production and revenue for firms driving national economic and technological competitiveness agendas.
Tracing the Origins of PSLs
The concept of PSLs dates back to 1949 when China's newly-established institutions like the People's Construction Bank offered cheap credit lines to boost industrialization and infrastructure. While various subsidies also drove resource allocation, loans provided a more recoupable form of financing compared to grants. Over time, as the economy became increasingly market-driven, PSLs emerged as the key maneuver by policy banks to channel credit according to strategic directives without distorting commercial banking.
Post-Reform Functions of PSLs
Since economic reforms began in 1978, PSLs have played indispensable stabilizing roles without directly conflicting with capitalism's "invisible hand." For instance, during the 2008 Global Financial Crisis, trillions of yuan in preferential loans from institutions like China Development Bank stabilized export sectors by easing credit restrictions. Similarly, burgeoning industries from railways to renewable energy received vital long-term funding support through below-market rate PSLs.
Mechanics of PSL Disbursement
Eligible organizations apply to China's State Council Development Research Center, which evaluates feasibility against criteria like technological innovation, import substitution impact and regional development alignment. Qualified borrowers then sign agreements with policy banks mandating transparency through regular audits of funds flows. Interest rates are set slightly above normal lending benchmarks to balance affordability with timely debt retirement obligations.
Mitigating Criticisms of PSLs
While effective countercyclical tools, some argue PSLs risk creating "zombie firms" that depend on perpetual refinancing. However, policy banks only rescue temporarily distressed yet fundamentally competitive companies. They also enforce strict covenants barring misuse, such as curbing land purchases or overseas expansion by struggling borrowers. Additionally, interest payment incentives encourage loan repayment within 5-7 years to avoid stagnation. Overall, PSL oversight aims to support transitioning rather than perpetually subsidizing recipients.
Outlook for PSLs in China's Evolving Economy
As China graduates to higher-income status, some question relevancy of industrial policy's directed credit approach. However, sectors like green tech manufacturing and biotech remain as economically and strategically sensitive as earlier targets. PSLs will thus feature in continuing efforts to guide structural transformation through nascent yet nationally essential industries. Recent programs indicate policy banks optimizing PSL models with lower interest rates and grace periods tailored to post-pandemic recovery needs as well.
In summary, while heavily criticized by free-market purists, PSLs have proven an invaluable tool enabling Communist Party prioritization alongside developmental capitalism. By learning from both strengths and gaps, other nations may replicate their strategic and prudent use for achieving manufacturing-led growth balancing stability with dynamism.