The People’s Bank of China on Thursday, March 20, decided to keep its key lending rates unchanged, as the Asian country is currently trying to support economic growth and stabilize the yuan amid the observed process of intensification of trade frictions.
The mentioned financial regulator held the 1-year loan prime rate at 3.1%. The 5-year loan prime rate was retained at 3.6%. The corresponding figures have not changed since October, when the People’s Bank of China decided to lower the cost of borrowing by a quarter of a percentage point.
It is worth noting that this week the decision to keep interest rates at the same level was also made by the Federal Reserve System. At the same time, officials of the central bank of the United States announced a likely lowering of the cost of borrowing by half a percent by the end of the current year.
Chinese loan prime rates, which are normally charged to banks’ best clients, are calculated monthly based on designated commercial lenders’ proposed rates submitted to the financial regulator. The 1-year loan prime rate has an impact on corporate and most household loans in China. The 5-year loan prime rate serves as a benchmark for mortgage rates.
Since the October decision by the People’s Bank of China to lower borrowing costs, the 7-day rate, the Asian country’s main policy rate, has remained at the 1.5% mark. The financial regulator is currently making efforts to protect the yuan, which is facing pressure from the threat of tariff increases.
Bruce Pang, adjunct associate professor at the Chinese University of Hong Kong, stated that policymakers recognize the robust growth of the Asian country’s economic system, which is the second-largest in the world, but at the same time continue to show caution amid persistent pressures. In the relevant context, the risks associated with trade tensions, the Fed’s steady policy stance, and the already reduced net interest margins of China’s banks were also mentioned.
It is worth noting that in the first two months of the current year, the economic system of the Asian country has shown a modest pick-up. Retail sales in China increased by 4% year-on-year during the mentioned period. Industrial output was also on an upward trajectory in the first two months of 2025. This indicator has shown growth which was 5.9% compared to the reading for the same period last year.
At the same time, the current inflationary process in the Asian country indicates that Beijing needs to take more active measures of policy support to ensure a sustainable recovery in the world’s second-largest economy. In February, consumer price inflation in China was in negative territory for the first time in a year. At the same time, producer price deflation persisted.
This year, boosting domestic consumption has become one of the main priorities for Beijing in the context of economic policy. The corresponding vector of efforts is related to the desire to mitigate the consequences of the escalation of the trade war. Currently, the cumulative tariff from the United States on goods imported from China is 20%. Beijing has already decided on retaliatory measures. China has decided to impose additional levies of 15% on imported chicken, wheat, corn, and cotton from the United States. The Asian country also put an extra 10% tariffs on soybeans, sorghum, pork, beef, aquatic products, fruits, vegetables, and dairy products shipped from the US.
For China, the trade war is a very sensitive circumstance. In this context, it is worth mentioning that last year one of the main driving forces behind the growth of the Asian country’s economy was exports. Obviously, against the background of Washington’s tightening tariff policy, it will be more difficult for Beijing to earn on external shipments. China is unlikely to be able to completely avoid the negative effects of the trade war, but reducing the scale of negative changes associated with this process is a realistic task in terms of implementation prospects.
Gary Ng, senior economist at Natixis, said that with the stronger call to support consumption, there is a growing chance that the People’s Bank of China will cut interest rates at the next monetary policy meeting or so. It was also noted that a decision on lowering the cost of borrowing could be made as early as April if retail and home sales do not improve, especially if inflation remains weak.
After it became known about the decision of the People’s Bank of China regarding interest rates, the yuan was little changed, trading at 7.2280 against the dollar. At the same time, the yield on 10-year government bonds fell by more than 2 basis points to 1.932%.
The Chinese offshore yuan has regained its position in recent weeks after falling to a 16-month low in January. Since Donald Trump’s victory in the United States presidential election in November, it has weakened by almost 1.8%.
Chinese top officials pledged to ramp up monetary policy easing measures in the current year. As part of the corresponding intentions, it is planned to cut interest rates at an appropriate time.
The Asian country’s authorities have set an economic growth target for 2025 at about 5%.
Goldman Sachs experts, in a note published in the current month, maintained their forecast, which stipulates that this year the People’s Bank of China will make two decisions on lowering the cost of borrowing by 20 basis points. It is expected that the relevant decisions will be made in the second and fourth quarters of 2025. Experts also predict two 50-basis-point cuts in the reserve requirement ratio, which determines the amount of cash that banks must hold as reserves, in the first and third quarters of the current year.
Governor of the People’s Bank of China Pan Gongsheng said this month that the financial regulator wants to maintain the stability of the currency at a reasonable and balanced level. According to media reports, preventing the yuan from weakening too quickly can be interpreted as a sign of goodwill ahead of any negotiations with Donald Trump on the trade deal to put a ceiling on tariffs.
Among the analysts interviewed by the journalists, there is currently a circulating view that any policy measures of the People’s Bank of China are likely to depend on the actions of the administration of the President of the United States in the context of trade issues.
It is worth noting that Donald Trump has threatened to increase existing tariffs from the US on goods imported from the Asian country at the beginning of next month. For China, the implementation of this intention will mean increased pressure on the economy and its growth prospects. Against the background of such circumstances, the gross domestic product (GDP) of the Asian country is unlikely to completely lose its upward momentum, but a slowdown in the dynamic of the increase in the indicator is more than likely.
In the first two months of 2025, the growth of Chinese exports showed a slowdown, which turned out to be more significant than expected. In January-February of the current year, the corresponding indicator rose by 2.3% compared to the reading for the same period in 2024. At the same time, the consensus forecast of analysts surveyed by the media called for an increase in Chinese exports in the first two months of 2025 by 5% year-on-year. The result recorded over the previous two months indicates the slowest growth rate of the mentioned figure since April 2024. This is an alarming signal for the Asian country’s economy, which relies heavily on external shipments of products.
Chinese imports in the first two months of the current year also showed a result that did not match forecasts in a negative sense. In January-February 2025, the corresponding indicator decreased by 8.4% year-on-year. This is the sharpest drop in this reading since July 2023. At the same time, analysts interviewed by the media expected that Chinese imports in the first two months of 2025 would show an increase of 1% year-on-year. But the final result was less optimistic.
