China’s economic landscape is undergoing significant changes as the People’s Bank of China (PBOC) prepares to implement a series of monetary policy adjustments aimed at stabilizing the market. Analysts anticipate the central bank to reduce the rate for the 7-day reverse repo. They expect it to increase only 20 basis points to 1.30% by the end of Q2/2025. Moreover, experts are predicting an even bigger drop in the rate. They forecast it to fall another 30 basis points, to 1.20% by end of 2025.
Projected cuts in the reverse repo rate are intended to energize economic activity. This strategy comes amid increasing trade tensions with the United States. The PBOC has signaled an intention to go on the offensive in rolling out its monetary easing measures. This will encompass a very sizeable 100 basis cut in banks’ reserve requirement ratio (RRR). This action is intended to provide additional liquidity in the banking system and support lending.
Besides these revisions, projections show a drop in loan prime rates (LPR). By the end of 2025, analysts expect the 1-year LPR to rise to 2.8%. They have the 5-year LPR decreasing to 3.3%. These new changes are expected to make borrowing more alluring and investment more attractive, two key ingredients in fostering economic growth.
China is currently looking to avoid an economic catastrophe, with a barrage of important economic indicators scheduled to be released on April 16. This will be the case March data, and the advance estimate of GDP growth for first quarter 2025. That leaves many analysts estimating that China’s GDP will be up only 5.4% year-over-year in Q1. They further predict an annual growth rate of just under 4.7% for all of 2025 as well.
Setting the stage for these changes in monetary policy is a backdrop of increasing trade friction between China and the U.S. Further tariffs would be very damaging to China, and Beijing knows it. They can slash its GDP growth rate by as much as 2 percentage points for the whole year. Such tariffs are a part of the recent trade war that has resulted in turmoil and unpredictability in global markets.
Currency depreciation and inflationary pressures are now having their mark in the United States. Annual inflation, as measured by the Consumer Price Index (CPI), is likely to increase to an annual rate of 2.6% in March, following an increase of 2.8% in February. This inflationary trend underscores the challenging economic interdependence between the two countries. They continue to tighten or cut their monetary policies at their own peril or encouragement, with burgeoning realization of potential trade wars.
US-Sino trade tensions seem to be coming to a head. In response, investors have been flocking to safe-haven assets such as gold to seek stability and protection against market volatility. As both countries continue to wrestle with their self-inflicted economic misfortunes, market observers will be closely tuned in to see how all of this plays out.