In a decisive move to support the economy and cushion the blow from escalating trade tensions with the United States, China’s central bank has slashed its key lending rates to record lows.
The People’s Bank of China (PBOC) cut its benchmark lending rates for the first time in seven months, as part of a broader stimulus effort announced earlier this month. Specifically, the central bank lowered the one-year and five-year loan prime rates (LPR) by 10 basis points to 3.0% and 3.5%, respectively — the lowest levels on record.
The LPRs are based on monthly submissions from 20 major Chinese banks and serve as key reference points for lending: the one-year LPR mainly affects corporate and household loans, while the five-year rate is a benchmark for mortgage lending.
The move comes just ahead of renewed trade negotiations between Beijing and Washington in Switzerland. In parallel, the PBOC also reduced the seven-day reverse repo rate by 10 basis points and lowered the reserve requirement ratio (RRR) — the amount of capital banks must hold in reserve — by 50 basis points, further boosting liquidity.
Mixed signals from China’s economy
Despite these policy efforts, recent economic data paints a mixed picture. China’s GDP grew by 5.4% in the first quarter of 2025, beating expectations. However, continued trade uncertainty threatens the annual growth target of around 5%.
April data showed industrial output rising 6.1% year-on-year, above the forecasted 5.5%, suggesting resilient business activity. Exports also grew 8.1% compared to April 2024, although shipments to the U.S. plunged by 21%. Increased trade with Southeast Asia and the EU helped offset the decline in U.S.-bound exports.
Domestic consumption remains weak, with retail sales up just 5.1%, missing expectations of a 5.5% increase. Households continue to be cautious amid ongoing uncertainty.
Investment data reflected similar concerns. Fixed asset investment rose 4% in the first four months of the year, but property investment dropped by a sharp 10.3%, underlining persistent fragility in the real estate sector. On the upside, the national unemployment rate fell to 5.0% in April, down from 5.2% in March.
Market reactions and analyst outlook
Financial markets reacted swiftly. Hong Kong’s Hang Seng Index jumped 1.3% at the open following the rate cuts, while the offshore Chinese yuan weakened slightly against the U.S. dollar.
Still, analysts caution that the impact of the monetary easing may be limited. “At the margin, the rate cuts may provide a minor tailwind for stocks, but it was widely expected and it’s obvious that credit access is not the thing holding borrowers back right now. Confidence remains weak, and the government needs to do more to improve that via the fiscal channel,” said David Scutt, APAC market analyst at StoneX.
Upgraded forecasts, but doubts persist
Despite lingering risks, several global banks have raised their growth forecasts for China following a weekend agreement between Beijing and Washington to pause tariffs for 90 days.
Goldman Sachs revised its full-year GDP forecast to 4.6% from 4%, noting that the resumption of dialogue between the two superpowers reduces the risk of strategic miscalculations. Nomura also raised its second-quarter forecast to 4.8% from 3.7%, citing the resumption of shipments to the U.S. “Front-loading will inevitably be followed by a significant payback effect after the 90-day pause ends on August 12,” the bank noted.
Nevertheless, most analysts remain skeptical that China will reach its 5% annual target. They stress that beyond monetary policy, restoring business and consumer confidence — possibly through more robust fiscal stimulus — will be critical for sustaining momentum.
