China Tries To Boost Economy And Eases Benchmark Rates For First Time Since Oct Amid Tariff Tensions

The People’s Bank of China (PBOC) announced a cut to its benchmark lending rates for the first time since October, accompanied by parallel reductions in deposit rates by major state-owned banks.

The one-year loan prime rate (LPR), which determines most lending rates across the country, was lowered by 10 basis points to 3.0 per cent

Source : Freepik

In a strategic attempt to cushion the slowing economy from the persistent trade frictions with the United States, Chinese policymakers have opted to ease monetary conditions.

On Tuesday, the People’s Bank of China (PBOC) announced a cut to its benchmark lending rates for the first time since October, accompanied by parallel reductions in deposit rates by major state-owned banks.

The one-year loan prime rate (LPR), which determines most lending rates across the country, was lowered by 10 basis points to 3.0 per cent, reported Reuters. Similarly, the five-year LPR — influential in mortgage pricing — also saw a 10 basis point reduction, dropping to 3.5 per cent. These rates now stand at their lowest levels since the 2019 overhaul of the LPR system.

The decision follows synchronised moves by top state lenders including Industrial and Commercial Bank of China, Agricultural Bank of China, China Construction Bank, and Bank of China. These institutions reduced their deposit rates by 5 to 25 basis points across various tenors, as seen on their respective mobile applications. The adjustments are likely to set a precedent for smaller banks to follow suit.

Mild Stimulus Reflects Policymakers’ Caution

Despite these steps, the scale of the rate adjustments remained modest. Analysts suggested that Chinese authorities are treading carefully in deploying stronger monetary tools, wary of further unsettling financial markets during an already delicate period in China-US relations.

"The central bank is likely to switch to a wait-and-see approach in coming months unless external geopolitical risks deteriorate enough to extinguish hopes that the economy can stabilise," said Marco Sun, chief financial market analyst at MUFG Bank (China).

According to ANZ strategist Xing Zhaopeng, the timing of the rate cut is deliberate. “One purpose is to repair commercial banks' net interest margin and get prepared for the future,” he said, projecting an additional cut before the end of July.

Weak Demand, Narrowing Margins Continue to Trouble Banks

The PBOC's decision comes as part of a broader plan laid out by Governor Pan Gongsheng and other financial regulators, timed ahead of China-US discussions in Geneva earlier this month. Although recent diplomacy led to a 90-day suspension of additional tariffs, uncertainty continues to cloud the bilateral trade outlook.

Nomura’s chief China economist Ting Lu remarked, "We still believe it will be quite challenging for Beijing to achieve its 'around 5 per cent' growth target unless it rolls out a sizable stimulus package."

Recent indicators point to continued fragility. Official data shows that new home prices in April remained flat for yet another month, extending a two-year trend of stagnant growth in the property sector. Moreover, new bank lending fell short of expectations last month, suggesting subdued credit appetite.

At the same time, commercial banks are feeling the strain of declining profitability. First-quarter earnings reports from the country’s largest lenders revealed shrinking net interest margins and, in some cases, profit declines. Data shows the average net interest margin hit a record low of 1.43 per cent in Q1. Analysts from China International Capital Corp expect further erosion of 10 to 15 basis points this year as lenders compete aggressively for business amid soft loan demand.

Moody’s analyst Nicholas Zhu commented, “The reduction in deposit costs partly mitigates the impact of lower asset yields, which remain under pressure as banks are expected to support the real economy.”

With growth momentum still uncertain and room for stimulus constrained, the effectiveness of these monetary tweaks will depend largely on whether broader structural reforms or stronger fiscal initiatives follow.