China reduces lending rates and reserve requirements in response to concerns over escalating tariff disputes.
China's economy is facing a turbulent period as it finds itself in a second trade war with the US, and in response, Beijing has taken measures to support the struggling economy. The People's Bank of China (PBOC) has implemented a series of monetary policy changes to help guide borrowing costs lower and bolster domestic demand.
PBOC Governor, Pan Gongsheng, announced a cut in the seven-day reverse repo rate to 1.4 percent from 1.5 percent during a briefing on May 8, 2025. He also revealed plans to trim the reserve requirement ratio (RRR) by half a percentage point. These changes are part of ten measures outlined by Pan, which also include rate reductions on various relending tools and loans for policy banks.
Pan's announcements came just hours after China announced plans for its first trade talks with US officials since US President Donald Trump unleashed a 145 percent tariff on most Chinese goods. The RRR cut is expected to release around 1 trillion yuan ($139 billion) in long-term liquidity according to Pan.
The trigger for these policy changes can be attributed to the ongoing trade tensions intensifying, with exports potentially contracting for the year due to Trump's tariffs threatening to cripple trade with the US. US Secretary of the Treasury, Scott Bessent, and US Trade Representative, Jamieson Greer, will travel to Switzerland later this week for trade talks with China led by Chinese Vice Premier He Lifeng.
Bloomberg Economics analysts, David Qu, Eric Zhu, and Shu Chang, commented on the monetary package, stating that it is "a powerful signal that policymakers are committed to boosting sentiment and shoring up growth. The PBOC's steps get the ball rolling. It's important that the government follows up—fiscal measures are more central for stabilizing the economy, and we anticipate more measures to come."
The monetary policy measures aim to help China achieve its growth target of around 5% for 2025 by stabilizing markets and supporting the real economy. The cut in the RRR and the reduction in the seven-day reverse repo rate are designed to implement a moderately loose monetary policy, increasing liquidity and reducing financing costs. The package also includes targeted support for technology investment, consumption, and financial market stabilization measures.
Despite the challenges, domestic consumption remains robust, with solid year-over-year growth in tourism and spending. The new measures are expected to further boost this resilience, and the trade talks between the US and China may lead to reduced trade friction and tariffs. China's broader strategy is to shift toward domestic demand to maintain growth, especially given the threat posed by the US tariffs.
In essence, China is engaging in an all-out economic battle to weather the storm brought on by its trade tensions with the US, with the PBOC using monetary policy as its formidable weapon. The battle lines have been drawn, and only time will tell if China can emerge victorious.
[1] CNBC. (2025, May 8). China cuts reserve requirement ratio to support economy amid trade tensions. Retrieved from https://www.cnbc.com/2025/05/08/china-cuts-reserve-requirement-ratio-to-support-economy-amid-trade-tensions.html
[2] Reuters. (2025, May 8). China cuts RRR and interest rate for second time this year. Retrieved from https://www.reuters.com/business/china-cuts-rrr-and-interest-rate-second-time-this-year-2025-05-08/
[3] South China Morning Post. (2025, May 8). China to lower RRR and interest rates to rev up stimulus, cut US imports. Retrieved from https://www.scmp.com/economy/china-economy/article/3151422/china-lowers-rrr-and-interest-rates-second-time-this-year
[4] Nikkei Asia. (2025, May 8). China eases monetary policy again to prop up economy. Retrieved from https://asia.nikkei.com/Economy/China-eases-monetary-policy-again-to-prop-up-economy
[5] Financial Times. (2025, May 8). China and US to hold trade talks as new stimulus measures are unveiled. Retrieved from https://www.ft.com/content/4234bac1-c42b-4b5a-89e8-fd9dd3584c6e
- The People's Bank of China (PBOC) reduced the seven-day reverse repo rate to 1.4 percent, aiming to lower borrowing costs and boost domestic demand.
- In addition, the PBOC outlines plans to decrease the reserve requirement ratio (RRR) by half a percentage point, expecting to release approximately 1 trillion yuan in long-term liquidity.
- The PBOC's monetary policy package is designed to support China's economy amid escalating trade tensions with the US, with a primary goal of stabilizing markets and achieving a growth target of around 5%.
- Analysts believe that targeted support for technology investment, consumption, and financial market stabilization measures will be essential in shoring up growth and maintaining China's economy in the face of increased trade friction and tariffs.
