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China: PBOC eases monetary policy to cushion tariff impact
- China announced its first stimulus package since the tariff escalation from 2 Apr ‘Liberation Day’. It has cut banks’ reserve requirement ratio (RRR) by 0.5% point and key interest rates by 0.1% point while providing additional support to targeted areas including service consumption, elderly care, equipment upgrading, consumer goods trade-in program, agriculture and the small & medium enterprises. These represent the key drivers in China’s boost for the local consumption and industrial sector. China also indicated strong support for financial market stability which remains important to anchor domestic sentiment.
- The US dollar weakness provided the opportunity for PBOC to ease monetary policy while the timing of the stimulus also reinforces the view that China does not expect a quick resolution to its trade war with US even as they are reported to be commencing discussions.
- In addition to the moves today, we see further room in 2H25 for 20 bps more cut to the benchmark 7-day reverse repo rate (with loan prime rates to fall by 20 bps) and 50 bps cut to banks’ RRR. These moves will bring the 7-day reverse repo rate, 1Y LPR and 5Y LPR to 1.2%, 2.8% and 3.3% by end-2025.
China cuts RRR and key interest rates, provides targeted support to sectors
The People’s Bank of China (PBOC) announced cuts to the banks’ reserve requirement ratio (RRR) and key interest rates at a press briefing on Wed (7 May). The 10 measures unveiled today are China’s first stimulus package in response to US’ tariff escalation since the 2 Apr ‘Liberation Day’ and follows the late-Apr Politburo meeting where policymakers pledged to “fully prepare” emergency plans and cut the RRR and policy rates “at a proper time”.
Our take on the easing measures:
The cuts to banks’ RRR and key interest rates are in line with expectation as recent US dollar weakness provided the opportunity for PBOC to ease monetary policy, coming ahead of the FOMC decision tonight.
China’s central bank also provides additional support to targeted sectors with rates on structural relending tools for commercial lenders and pledged supplementary lending for policy banks to be cut by 25 bps and the housing provident fund loan rate to drop by 25 bps. PBOC announced new re-lending facilities for service consumption and elderly care as well as an increase in quota for relending loans to support equipment upgrading, consumer goods trade-in program, agriculture and the small & medium enterprises. These represent the key drivers in China’s boost for the local consumption and industrial sector.
Overall, the size of the stimulus package may be slightly smaller compared to that in Sep 2024 where the 7-day reverse repo rate was cut by 20 bps along with 0.5% point cut to banks’ RRR and a slew of measures to support the housing market (such as lower down-payment ratios, mortgage rate cut, re-lending program for affordable housing) and financial markets.
However, the policymakers have continued to indicate strong support for financial market stability which remains important to anchor domestic sentiment. China Securities Regulatory Commission (CSRC) said that China fully supports its sovereign fund, Central Huijin and PBOC in serving the function as a quasi-stabilization fund, potentially limiting the extend of any market sell-off.
The timing of the stimulus reinforces the view that China does not expect a quick resolution to its trade war with US even as they are reported to be commencing discussions. More stimulus measures will be needed to bolster domestic demand if China’s economic downturn becomes more pronounced in a prolonged negotiation process.
In addition to the moves today, we see further room in 2H25 for 20 bps more cut to the benchmark 7-day reverse repo rate (with loan prime rates to fall by 20 bps) and 50 bps cut to banks’ RRR. These moves will bring the 7-day reverse repo rate, 1Y LPR and 5Y LPR to 1.2%, 2.8% and 3.3% by end-2025.
Overall, we still maintain China’s GDP growth in 2025 at 4.3%. Based on current US tariff setting, we expect China’s economy to weaken sharply with growth to slip to around 4.6% y/y in 2Q25 and below 4% y/y in 2H25 (1Q25: 5.4% y/y). There is a high degree of uncertainty in our estimate, depending on when we get a breakthrough in the US-China trade negotiations and the eventual tariff rates as well as policy measures to offset the external challenges.
Ho Woei Chen
Economist
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