In Depth: Beijing Bets on New Policy Tool to Bolster Emerging Sector Investment

China is preparing to launch a substantial financial instrument worth 500 billion yuan ($70 billion) to direct capital into emerging sectors like artificial intelligence (AI), with a specific quota reserved for private enterprises. The initiative, anticipated to be introduced by the end of September, is expected to help buffer the Chinese economy against the effects of U.S. tariffs [para. 1][para. 2]. Analysts predict the instrument could ultimately unlock up to 5 trillion yuan in investment, though its effectiveness will depend upon the fiscal health of local governments and the engagement of private businesses [para. 3].

The allocation of the 500 billion yuan will come from three policy banks. The China Development Bank (CDB) is contributing half, mainly targeting manufacturing and key infrastructure projects. The Agricultural Development Bank of China (ADBC) will provide 150 billion yuan, largely for rural infrastructure, while the Export-Import Bank of China will supply the rest, aiming to support international trade-related initiatives. The funds are aimed at long-term projects, with terms spanning 10, 15, or 20 years [para. 4][para. 5].

A critical part of the mechanism is the use of the central bank’s pledged supplementary lending (PSL) facility, which offers low-cost funding to targeted sectors, at an attractive 2% interest rate for a one-year PSL loan, compared to the higher 3% benchmark loan rate. Policy banks will supplement these funds by issuing bonds. Investment will flow primarily into eight domains: digital economy, AI, low-altitude economy, consumption infrastructure, green and low-carbon development, agricultural and rural projects, transportation and logistics, as well as municipal and industrial park projects. Projects already underway or scheduled to start by the year’s end will be prioritized [para. 6][para. 7].

Of notable importance is the requirement that 100 billion yuan—20% of the total—must be channeled to private enterprises, emphasizing the government’s intention to support and invigorate this sector [para. 8]. The implementation will be managed by infrastructure fund companies owned by the policy banks, which bring significant prior experience to this endeavor [para. 9].

Funding will be distributed via two main approaches: equity investment or shareholder loans. In the former, fund subsidiaries take equity stakes in project companies without direct operational control, exiting after an agreed period. In the latter, shareholder loans are arranged, often preferred by ADBC, shifting capital risk onto project owners rather than lenders [para. 10][para. 11]. A new feature will allow these shareholder loans to go directly to parent holding groups, which can distribute funds to their subsidiaries as needed, increasing flexibility for complex project structures [para. 12].

Experts generally agree that this new instrument will boost investment, especially in infrastructure, though opinions differ regarding the scale. Zhang Yu of Huachuang Securities estimates it could eventually unlock at least 5 trillion yuan in investment, while Huatai Securities forecasts a range of 1.5 to 3 trillion yuan materializing over five years, contingent on local governments’ ability to provide matching funds and the appetite of commercial banks and private companies [para. 13][para. 14][para. 15].

However, headwinds persist. In the first eight months of the year, private sector fixed-asset investment declined by 2.3% year-on-year. Analysts point out that local governments are short on capital and viable projects, with strict debt controls posing a major barrier. Since the mid-2023 launch of a debt-resolution campaign, local officials have become increasingly cautious about projects generating hidden debt, prioritizing debt reduction over short-term economic growth. Additionally, falling prices have undermined project profitability, threatening the pipeline of qualifying investments [para. 16][para. 17][para. 18][para. 19][para. 20].