Interest subsidy plan to spur spending

China will offer a new loan interest subsidy for businesses in eight eligible categories of the service sector, which officials and analysts said is an innovative step to enhance service offerings and spur spending appetites that will help the country meet its annual growth targets.

"With an interest subsidy ratio of 1 percent, every 1 yuan (14 cents) in subsidy could potentially catalyze 100 yuan in loans for market players to boost the supply of services in the consumption sector," Liao Min, vice-minister of finance, said at a news conference on Wednesday.

A day ahead of the conference, the implementation plan for the new policy, targeting businesses in catering and accommodation, healthcare, elderly care, child care, housekeeping, culture and entertainment, tourism and sports, was unveiled.

Under the initiative, businesses can receive subsidies for loans of up to 1 million yuan. Borrowers will receive a 1 percentage point annual interest rebate for up to one year. The central government will cover 90 percent of the subsidies, with provincial authorities responsible for the remaining 10 percent.

To qualify, the loans must be taken out between March 16 and Dec 31 this year, and the funds must be used to improve consumption infrastructure or increase service supply capacity.

After the expiration of the policy, the government will conduct a comprehensive evaluation of their effectiveness and consider extending the policy duration, expanding the scope of eligible sectors, and including more financial institutions, according to Liao.

"Many households are now spending more on areas like household services, fitness, tourism, beauty, education, and healthcare than on physical goods, indicating the significant growth potential of service consumption in China," said Wang Bo, deputy director of the department of trade in services and commercial services at the Ministry of Commerce.

In the first half of this year, China's total retail sales of consumer goods increased by 5 percent year-on-year, while retail sales of services grew by 5.3 percent, data from the National Bureau of Statistics showed.

Wang noted that the policy is designed to address the mismatch between consumer demand and service supply, by empowering businesses to upgrade and diversify their offerings.

"As household incomes continue to rise, we are seeing a rapid transition from a goods-dominated consumption structure to one where services take the lead. This will accelerate the release of pent-up demand for high-quality services," Wang added.

In particular, analysts said that as the effectiveness of trade-in programs for boosting durable goods consumption, which kicked off in 2024, is likely to diminish over time, efforts to bolster services consumption will better position the country to weather external shocks and hit its growth target.

The Political Bureau of the Communist Party of China Central Committee held a tone-setting meeting in end-July that emphasized the need to unlock the full potential of domestic demand by fostering new growth drivers in services consumption.

Dong Ximiao, chief researcher at Merchants Union Consumer Finance, said that while China's domestic consumer market has seen an overall recovery and improvement so far this year, the pace of recovery still needs to be strengthened.

"In particular, consumer demand among households needs to be boosted, and price levels are still at a relatively low level," Dong said.

At this stage, analysts noted that the development of services consumption will assist in addressing the tepid growth in prices.

"Broaden service options — unique travel packages, personalized fitness plans, niche entertainment — and providers are often able to command higher premiums," said Cao Jing, an associate researcher at the Institute of Finance and Banking of the Chinese Academy of Social Sciences.

Meanwhile, consumers are willing to pay for experiences and quality-of-life enhancements, precisely the areas where value perception translates into pricing resilience, Cao said.

When enterprises achieve sustainable pricing, they hire more employees and pay better wages. This disposable income would flow into consumption again, especially services, creating a closed-loop economic accelerator, Cao added.