The central bank of China on Monday, April 21, left loan prime rates unchanged, which is generally the expected decision of this financial regulator, since strong macro data is currently being observed in the Asian country, allowing Beijing to focus on stabilizing the yuan amid trade tensions with the United States, which has become an objective economic reality in a global scale as part of the trade war.
The People’s Bank of China has decided to keep the 1-year loan prime rate at the same level. Currently, this figure is 3.1%. The 5-year loan prime rate has been maintained at the 3.6% mark. The People’s Bank of China made decisions on the mentioned indicators after data on the state of affairs in the Asian country’s economic system was published, which turned out to be better than preliminary expectations.
In the first quarter of the current year, China’s gross domestic product (GDP) showed growth of 5.4% compared to the figure recorded in January-March 2024. Moreover, retail sales and industrial output increased in the Asian country last month. It is worth noting separately that the growth rates of the relevant indicators exceeded the preliminary expectations of analysts interviewed by the media.
The 1-year loan prime rate is a factor affecting corporate and most household loans in the Asian country. The 5-year loan prime rate is a benchmark for mortgage rates. It is worth noting that the People’s Bank of China has not adjusted these figures since October last year.
Zhiwei Zhang, president and chief economist at Chinese hedge fund management company Pinpoint Asset Management, said that the Asian country’s financial regulator has abandoned cutting the loan prime rates because macro data has not yet shown signs of weakening. It was also noted that the People’s Bank of China will decide on lowering the mentioned indicators when hard data softens.
Information on the situation in the economic system of the Asian country, which is the second-largest in the world, for April will reflect the degree of impact of the tariff policy measures of the President of the United States Donald Trump. The corresponding data will start coming in from April 30. The official purchasing managers index figures will also be published.
As reported by LSEG, trade data will be published on May 9, and inflation numbers on May 10.
After it became known about the decision of the People’s Bank of China made on Monday, the onshore yuan rose 0.2% to 7.2848 against the dollar. The offshore yuan increased by 0.22% to 7.2846 against the dollar. Mainland China’s CSI 300 rose 0.36% on the news of the decision made by the People’s Bank of China.
It is worth noting that the mentioned decision of the financial regulator of the Asian country coincided with the preliminary expectations of experts, interviewed by the media. More than 85% of them were confident that the People’s Bank of China would keep rates steady.
Dutch bank ING last week also predicted that the Asian country’s financial regulator is likely to hold rates. At the same time, analysts Lynn Song and Min Joo Kang pointed out that the loan prime rate was unlikely to shift without the 7-day repo rate being cut first.
The 7-day repo rate in China is currently 1.5%. The last time this indicator was lowered by 20 basis points was in September last year.
ING experts also noted that low inflation and strong external headwinds against the background of escalating tariff threats are sufficient arguments in favor of easing the monetary policy of the People’s Bank of China. At the same time, in the relevant context, they underlined that currency stabilization considerations may prompt the Asian country’s financial regulator to wait for the Federal Reserve to cut interest rates.
Ryota Abe, an economist at Sumitomo Mitsui Banking Corporation, suggested during a conversation with media representatives that the People’s Bank of China is unlikely to use the currency to overcome economic difficulties, as these actions could potentially provoke a massive capital outflow.
The United States imposed tariffs of up to 245% on goods imported from an Asian country. China imposed 125% levies as countermeasures.
Despite encouraging data on GDP growth in the Asian country in the first quarter of 2025, consumer prices in the world’s second-largest economy continue to be in deflation territory. In March, consumer prices in China fell 0.1% year-on-year. Producer prices in the Asian country decreased by 2.5% last month compared to the same period in 2024. In this case, it is the 29th consecutive month in the territory of deflation and the largest contraction since November 2024.
Last week, the media published information according to which in the first quarter of 2025, Beijing increased government spending at the fastest pace since 2022. These actions indicate that China is strengthening its support for the economy in preparation for a drop in external demand amid an escalating trade war with the United States. According to media calculations based on data published by the Asian country’s Ministry of Finance, the combined expenditure in the general public budget and the government fund account, China’s two main fiscal books, rose to 9.26 trillion yuan ($1.3 trillion) in January-March 2025. This indicator increased by 5.6% year-on-year. It is also noteworthy that this is the strongest gain in the first quarter in three years.
The mentioned figures mean that in China in January-March 2025, almost 22% of the outlays planned for the full year were spent. For the first quarter of 2024, the corresponding figure was 21.6%.
The increase in public spending is a necessary measure for Beijing, which is currently striving to shield the economy. Rising tariffs from the United States may cause a decrease in shipments of products from China. This is almost a guaranteed consequence of the trade war, which will be a blow to the economy of the Asian country, which relies heavily on exports. At the same time, Beijing is facing the challenge that is a multi-year downturn in the housing market and deflation will keep consumer and business sentiment weak.
Currently, the expectation among economists surveyed by the media is that the growth rate of the Asian country’s GDP will slow down in the second quarter of 2025. This forecast is because it is during the mentioned period that tariffs from the United States will affect the condition of the world’s second-largest economy. In the current quarter in the Asian country, the wave of export front-loading will pass, and benefits from a consumer trade-in program to taper off.
Several major banks have revised down their forecasts for China’s economic growth in 2025. It is worth noting that the projections data contains indicators that are below Beijing’s target. The Chinese authorities have set the economic growth target for 2025 at around 5%. Currently, officials in the Asian country are focused on implementing the measures already announced to support economic activity. At the same time, these officials note that they still have ample scope and tools to add stimulus, if necessary.
Citi predicts that the Asian country’s GDP will grow by 4.2% in 2025. The previous version of the projection from this bank provided for an increase in the mentioned indicator by 4.7%. Goldman Sachs expects China’s GDP to grow by 4% in 2025. The previous version of this financial institution’s forecast provided for an increase in the mentioned indicator by 4.5%. Morgan Stanley expects the Asian country’s GDP to grow by 4.2% in the current year. The previous forecast of this bank provided for a 4.5% increase in the specified indicator. UBS expects China’s GDP to grow by 3.4% in 2025. The previous forecast of this financial institution provided for a 4% increase in the mentioned indicator.
Goldman Sachs economist Lisheng Wang wrote in a note last week that Chinese fiscal policy will turn from a growth drag last year to a major driver this year, although it should still be insufficient to fully offset the impact of external shocks. The expert also suggested that the National People’s Congress could approve an extra-budget bond issuance quota later this year. Moreover, Lisheng Wang said that the central bank of the Asian country is expected to cut policy rates, lower the amount of reserve lenders must keep in reserve, and buy bonds as the government further accelerates debt issuance and spending of the money raised in the coming months.
Faster tax rebate payouts are characterized by some experts cited by the media as a way to offset some of the pressure that has become a reality for exporters amid the US tariffs. The payout as a share of exports last month came in at 11%. This is evidenced by the calculations of the media. It is worth noting that the mentioned indicator showed a moderate increase compared to the reading for the same period in 2024.
The property downturn continues to be a factor in the negative impact on Chinese government income. In March, land sales fell by 16.5% year-on-year. Real estate-related revenues decreased 0.1% last month compared to the reading for the same period in 2024.
Tax revenue continued to fall in the Asian country in March. It is worth noting that in this case, there has been a decrease in the indicator for the second month in a row. The increase in non-tax income in March in China is almost halved. The local authorities of the Asian country rushed to sell bonds. These actions were intended to swap the so-called hidden debt onto books in a program aimed at alleviating their cash strains and reducing excessive fines imposed on businesses, which are a source of non-tax income.
The ongoing contraction in land sales and tax revenues caused total income under the two major budgets to fall 2.6% year-on-year in the first quarter of 2025. The corresponding figure was recorded at the 6.94 trillion yuan mark.
The gap between government income and spending has increased. The broad budget deficit increased by 41% year-on-year to 2.3 trillion yuan.
