China Drops the Rates – Will the Economy Catch the Bounce?

Is China's economy slowing down? A recent announcement from the People's Bank of China might suggest so. The central bank has decided to reduce the amount of cash banks are required to hold in reserve, freeing up about 1 trillion yuan ($142.21 billion) for new lending. A move is often used to inject liquidity into the financial system and stimulate economic growth. Interestingly, this comes right after the USA cut its own federal rates. Could China's decision be a response to stay competitive, or is there more beneath the surface? This rate cut is a sign of slowing growth or a strategic play to keep up with the global economic race.  

Central Bank Policy Adjustments on the Horizon 

Governor Pan Gongsheng, speaking alongside two other top financial regulators, didn’t specify an exact timeline for when the central bank might relax its RRR (Reserve Requirement Ratio) policy but hinted it could happen soon. Based on current conditions, we might see another rate cut upto 0.5 basis points by the year's end, he mentioned. He also noted that the PBOC plans to reduce the 7-day repo rate by 0.2 percentage points to 1.5%.  

Lynn Song, ING’s chief economist for Greater China, described the repo rate cut as "the most important" takeaway from the press conference. “Markets were expecting a few 10 basis point cuts, so a 20-basis point cut is a bit stronger than anticipated,” Song noted in a statement on Tuesday. “That said, the overall impact will depend on what comes next—whether we see more cuts or if the PBOC decides to adopt a wait-and-see approach after this policy package.” 

Sentiment Boost and Potential Loan Prime Rate Cuts 

According to Song, the RRR cut was more about lifting market sentiment than addressing a lack of funds for banks to lend. The real issue is the limited demand for borrowing, he explained. 

During the press conference, Pan hinted at a possible 0.2-0.25% cut in the loan prime rate, though he didn’t clarify when it might happen or whether it would apply to the one-year or five-year Loan Prime Rate (LPR). Recently the PBOC left its key benchmark lending rates unchanged during its monthly review. The LPR plays a big role in setting the rates for corporate and household loans, including mortgages. Pan also mentioned plans to offer more support for the struggling property market. These include extending measures for two years and reducing mortgage interest rates. 

China's Approach to Monetary Policy 

Pan took over as PBOC governor in July 2023. In his first press conference as central bank chief in January, he hinted at cutting the reserve requirement ratio (RRR). It's rare for policy announcements to be made at these events, as they’re usually shared through online releases or state media. By March, speaking at China’s annual parliamentary session, Pan reaffirmed that there was more room to cut the RRR, so this reduction was expected for months. 

Unlike the U.S. Federal Reserve, which focuses mainly on a single interest rate, the PBOC manages monetary policy with a mix of different rates like RRR, LPR. China’s government structure also means major policies are set at a much higher level than that of the financial regulators who spoke on Tuesday. During key meetings in July, there were calls to hit full-year growth targets and boost domestic demand. 

Real Estate Struggles and Government Response 

Li Yunze, head of the National Financial Regulatory Administration, addressed the challenges facing real estate companies at press conference, noting that slowing property sales have made it tough for developers to deliver homes on time. The administration, which took over and expanded the banking regulator's role, was established last year as part of a broader shake-up of China’s financial regulatory system. 

In January, China introduced a whitelist to prioritize real estate projects for support. Li shared that over 5,700 projects have been approved so far, with financing reaching 1.43 trillion yuan ($200 billion), which has helped complete more than 4 million homes. However, the gap is still significant. Nomura estimated late last year that around 20 million homes in China had been pre-sold but not yet completed and handed over to buyers. 

Broader Implications of the Move 

China’s recent policy steps—cutting interest rates and supporting real estate projects—aim to counter slowing economic growth. The real estate slump has hit consumer confidence and local government revenues hard. By financing priority housing projects, the government hopes to deliver unfinished homes, addressing concerns in the property market.  

However, the lack of significant fiscal stimulus raises concerns among economists, who argue that relying solely on monetary policy won’t be enough to drive broad economic recovery. Local governments are focused on filling budget gaps and limiting new growth opportunities. The key question is whether the central government will introduce stronger fiscal measures, like increased spending or larger deficits. While the PBOC can adjust monetary policy, real recovery depends on a bigger fiscal push.  

Economists expect continued interest rate cuts and real estate support, but a substantial economic rebound may require more aggressive fiscal policies. The government’s ability to manage the ongoing housing crisis and deliver on the millions of unfinished homes will be crucial in determining China’s growth trajectory in the coming months. Stay tuned for more such updates, and don't forget to subscribe to our weekly newsletter!