China Slashes Lending Rates to Record Lows Amid U.S. Trade Tensions and Economic Uncertainty

In a decisive move to stabilise the world’s second-largest economy, China’s central bank, the People’s Bank of China (PBOC), has slashed its key lending rates to historic lows. This monetary easing comes amid escalating trade tensions with the United States and follows a broader economic stimulus package unveiled earlier this month.

The PBOC lowered both its 1-year and 5-year loan prime rates (LPR) by 10 basis points—bringing them to 3.0% and 3.5% respectively. These reductions mark the first cut in seven months and set both rates at all-time lows. The 1-year LPR serves as the benchmark for most corporate and household loans, while the 5-year rate is widely used to set mortgage costs.

This move, widely anticipated by markets, forms part of a broader strategy aimed at softening the blow from U.S. tariffs and reviving domestic economic momentum. With trade talks between Beijing and Washington resuming in Switzerland, the timing of the rate cuts is seen as both economic and strategic.

Alongside the LPR cuts, the PBOC also lowered the seven-day reverse repurchase rate by 10 basis points and trimmed the reserve requirement ratio (RRR)—the amount of cash banks must hold in reserve—by 50 basis points. These combined actions aim to enhance liquidity and stimulate borrowing across both consumer and corporate sectors.

Market Reactions and Cautious Optimism

Financial markets responded positively—at least initially. The Hang Seng Index, Hong Kong’s benchmark stock index, surged by 1.3% at the open. The Chinese offshore yuan, however, dipped slightly against the U.S. dollar as traders anticipated more liquidity in the system.

Despite the boost in investor sentiment, analysts remain cautious. David Scutt, APAC market analyst at StoneX, noted that the cuts may offer only limited support for equities. “At the margin, the rate cuts may provide a minor tailwind for stocks, but it was widely expected. It’s obvious that credit access is not the thing holding borrowers back right now,” Scutt said. “Confidence remains weak, and the government needs to do more to improve that via the fiscal channel.”

Mixed Economic Signals

China’s economic data paints a complex picture. While the economy grew by a solid 5.4% in the first quarter—beating expectations—the looming threat of prolonged trade friction with the U.S. casts a shadow over the government’s ambitious 5% annual growth target.

On the industrial front, there were some bright spots. Industrial output in April increased by 6.1% year-on-year, surpassing expectations of 5.5%, indicating robust factory activity. Exports also saw a notable 8.1% year-on-year jump. However, this headline figure masks a steep 21% plunge in shipments to the U.S., underscoring the toll of tariffs and trade barriers. Fortunately, increased trade with Southeast Asia and the European Union has helped cushion this blow.

Retail sales growth, a critical measure of domestic consumption, came in below expectations—rising by 5.1% compared to the projected 5.5%. This suggests households are still wary, likely due to an uncertain job market and broader economic concerns.

Fixed asset investment grew modestly by 4% over the first four months of the year. But perhaps most concerning was a sharp 10.3% decline in property investment, reflecting continued weakness in China’s beleaguered housing sector.

On a more positive note, the labor market showed signs of resilience. The national unemployment rate fell to 5.0% in April, a marked improvement from 5.2% in March and 5.4% in February.

Global Banks Revise China Outlook

In light of renewed trade negotiations and policy support, several global financial institutions have revised their forecasts for China’s economic performance in 2025. Over the weekend, Beijing and Washington agreed to pause further tariffs for 90 days—a development that has boosted optimism and reduced the risk of a trade miscalculation.

Goldman Sachs upgraded its full-year GDP forecast for China from 4% to 4.6%, citing improved geopolitical conditions. “With the resumption of US-China trade talks, the left-tail risk of miscalculation could be more contained,” the bank said in a note to investors.

Similarly, Nomura lifted its second-quarter GDP forecast from 3.7% to 4.8%, pointing to the resumption of U.S.-bound shipments as a key factor. However, the bank cautioned that this increase could be temporary. “Front-loading will inevitably be followed by a significant payback effect after the 90-day pause ends on August 12,” Nomura warned.

Conclusion

While the PBOC’s interest rate cuts and broader stimulus measures demonstrate Beijing’s commitment to propping up economic growth, the road ahead remains uncertain. Lingering trade disputes, sluggish domestic consumption, and a fragile real estate sector continue to weigh on sentiment.

What’s clear is that China is prepared to deploy a mix of monetary and fiscal tools to weather the storm. But whether these efforts will be sufficient to sustain momentum and restore confidence remains to be seen. For now, markets and policymakers alike will be watching closely as Beijing navigates this complex economic landscape.