China’s Stimulus Bond Pro gram Faces Effectiveness Test

Chinas top economic planner appears to have temporarily halted a program that has channeled nearly 2 trillion yuan to government-backed infrastructure projects amid concerns that banks have shown little interest in participating.

Other highlights from the meeting of finance ministSince June， the National Development and Reform Commission （NDRC） has not announced any new projects to tap the program， where two policy banks， National Development Bank and the Agricultural Development Bank of China， issue a special type of bonds to help finance construction projects.

New approvals had been expected in July， but were delayed because the government wants to evaluate the results of earlier investments， according to people close to the situation.The NDRC would not approve any new investments by the fund until the review ends， according to the people. It is unclear how long this may last.

Inspectors had been sent to local governments， banks and construction companies to examine the progress of projects supported by the program and assess how much investment from other sources， including loans from other banks， had been made to those projects， an executive from a bank being inspected said.

Since last August， the bond plan has channeled about 1.8 trillion yuan （US$ 271 billion） from lenders， including the state-run Postal Savings Bank， to mainly local government-backed enterprises toward infrastructure development. The program was conceived as a way to stimulate the economy and motivate investment from commercial banks and private investors in addition to the 1.8 trillion yuan.

Firms receiving financial support from the bond program pay very little to use the capital because the Ministry of Finance provides subsidy that covers 90 percent of the interest payments on the bonds.

The government has wanted more investors to chip in， by purchasing the bonds or making loans directly to projects funded by the program， according to the bank executive. Lending from other investors is important because investment from the bond program often accounts for only 10 to 15 percent of the capital a project needs， he said.

But the response from many banks has been disappointing. One reason is that the bond fund usually supports projects conducted by the financing platforms owned by low-level authorities， such as county governments， to which big banks are often reluctant to make loans， according to several bank employees who have worked on related projects.

Also， the bond yields are not appealing to banks even with the central governments subsidy because there are other investment options with similar risk， such as bonds issued by local governments， according to a manager at the China Construction Bank.