By Tina Teng
Published on
ADVERTISEMENTThe People’s Bank of China (PBOC) has lowered its benchmark lending rates for the first time in seven months as part of ongoing efforts to mitigate the impact of US tariffs on its economy.
The central bank cut the 1-year and 5-year loan prime rates (LPR) by 10 basis points to 3.0% and 3.5%, respectively, both record lows. These are key lending benchmarks based on monthly submissions from 20 major Chinese commercial banks. The 1-year LPR is a reference for corporate and household loans, while the 5-year LPR is typically used as the benchmark for mortgage rates.
Today’s rate reduction had been widely anticipated as part of the broader stimulus package unveiled earlier in the month. Just ahead of trade talks between Beijing and Washington in Switzerland, the PBOC also lowered the seven-day reverse repurchase rate by 10 basis points and cut the reserve requirement ratio (RRR), the amount of capital banks must hold in reserve, by 50 basis points.
China’s benchmark stock index, the Hang Seng Index, surged at the market open in Hong Kong, gaining 1.3% by 5:30 CEST. Meanwhile, the Chinese offshore yuan weakened slightly against the US dollar. However, analysts expect the rate cuts would have a minor impact on its stock markets as more easing measures are needed to bolter’s confidence.
“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,” David Scutt, APAC market analyst at StoneX, Australia, said.
China releases mixed economic data
China’s economy grew by 5.4% in the first quarter of the year, exceeding expectations. However, trade uncertainties threaten to derail its 5% annual growth target. Recent economic indicators paint a mixed picture of the world’s second-largest economy.
On Monday, data from the National Bureau of Statistics showed that industrial output rose by 6.1% year-on-year in April, beating forecasts of 5.5%, reflecting resilient business activity despite mounting trade pressures. In addition, exports surged 8.1% year-on-year in April, though shipments to the US plunged 21%. Customs data showed that increased exports to Southeast Asia and the EU helped offset the decline in trade with the US.
However, retail sales rose by just 5.1%, falling short of expectations for a 5.5% increase. This underscores continued weakness in domestic consumption, as households remain cautious amid ongoing economic uncertainty.
Fixed asset investment grew by 4% in the first four months of the year, though property investment fell sharply by 10.3%, highlighting continued fragility in the housing sector. On a more positive note, the unemployment rate fell to 5.0% in April, down from 5.2% in March and 5.4% in February.
Global banks raise China’s economic outlook
Several global investment banks have upgraded their forecasts for China’s economic growth this year following the agreement between Beijing and Washington to pause tariffs for 90 days over the weekend. Nonetheless, most analysts believe China is unlikely to meet its 5% growth target set earlier this year.
Goldman Sachs revised its full-year growth forecast for China up to 4.6% from 4%. “With the resumption of US-China trade talks, the left-tail risk of miscalculation between the US and China could be more contained than before, in our view,” the bank stated.
Nomura also upgraded its forecast for second-quarter GDP growth to 4.8% from 3.7%, citing the resumption of shipments to the US. “The resumption of US-bound shipments will naturally reduce the need to re-route shipments. Front-loading will inevitably be followed by a significant payback effect after the 90-day pause ends on 12 August,” the bank said.
