WEF Highlights Flaws in 'Below-Market' Financing Claims Against China

A number of international research institutions appear to be mistaken in categorising financing from Chinese commercial banks as subsidies, primarily because they use benchmarks that do not reflect the market realities in developing countries, leading to misleading conclusions, according to an article recently published on the World Economic Forum (WEF) website. Recent industrial policy reports by international organisations such as the Organisation for Economic Co-operation and Development (OECD) argue that Chinese commercial banks provide large amounts of financing at ‘below-market’ interest rates to Chinese firms, citing this as evidence of large-scale industrial subsidies in China, noted the article co-authored by Yang He, secretary-general of the China Modern Finance Society, and three other experts.

For instance, the article explains that equating China’s Loan Prime Rate (LPR) with a risk-free benchmark creates the false assumption that any loan interest rate below the LPR is automatically below the market rate. In reality, the LPR merely serves as a reference rate for loan pricing, while commercial banks apply differentiated pricing by adjusting spreads based on the profile of each borrower. A loan interest rate lower than the LPR is far more likely to reflect a borrower’s low credit risk or high collateral quality, rather than preferential policy treatment.

Furthermore, the authors state that when the OECD methodology is applied to a sample of US corporate bond issuers, the results also show equally widespread ‘below-market’ financing. This finding further demonstrates that the choice of benchmark heavily influences conclusions about whether financing is subsidised. The authors argue that these studies often use ‘market benchmarks’ that do not reflect the real conditions of China’s financial system and commercial lending practices. Consequently, corporate loans with interest rates below these artificial benchmarks are deemed to contain a subsidy element. By reconstructing a more comparable market benchmark that aligns with the realities of China’s financial markets and corporate sector, the article found that the average financing cost for the sampled firms was actually 0.2 percentage points higher than the market benchmark. Moreover, the profitability levels of major Chinese commercial banks are comparable to, and in some cases exceed, those of similar large banks in the United States, Europe, and Japan, indicating no systemic sacrifice of profitability to provide ‘below-market’ financing, the authors concluded.