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China Pauses Further Monetary Easing After May Rate Cut

The People’s Bank of China (PBOC) opted to keep its benchmark lending rates unchanged on Friday, signaling a more measured approach to monetary policy after last month’s surprise rate cut and recent progress in trade negotiations with the United States.

The central bank held the one-year Loan Prime Rate (LPR) at 3.00% and the five-year LPR at 3.50%, both matching expectations from a Reuters poll of economists. These rates serve as key benchmarks for corporate and household lending, including mortgages.

The decision comes on the heels of a 10 basis point reduction in both rates last month — the first cut since October — as Chinese authorities moved to bolster growth amid mounting global economic uncertainty.

Trade Truce Provides Breathing Room

The PBOC’s cautious stance follows an easing of trade tensions between the world’s two largest economies. Earlier this month, trade representatives from Washington and Beijing reached a new consensus in Geneva, agreeing to honor prior agreements while suspending additional tariffs, particularly on rare earth elements and advanced technology products.

This partial detente has given Beijing more flexibility to focus on domestic monetary policy without the added pressure of escalating trade conflict. The trade agreement also helped stabilize China’s currency after a period of extreme volatility.

The offshore yuan, which had fallen to a historic low of 7.4287 per dollar in early April following former President Donald Trump’s aggressive 145% tariff hike on Chinese imports, has since recovered sharply. As of Friday, the yuan stood at 7.1805 per dollar, reflecting more than 2% appreciation year-to-date.

“With the renminbi currently experiencing reduced foreign exchange pressure, the PBOC is likely to enjoy greater latitude for future policy maneuvering,” said Bruce Pang, adjunct associate professor at CUHK Business School.

Room for Future Stimulus, But No Immediate Urgency

While near-term growth risks have moderated, Chinese policymakers remain cautious about further monetary easing in the immediate future.

Nomura economists recently revised their forecast for additional easing, predicting only a modest 10 basis point rate cut in Q4 2025, down from their earlier 15 basis point estimate. They continue to expect a 50 basis point reduction in the reserve requirement ratio (RRR) later this year, allowing banks to lend more freely.

“The current policy stance reflects a strong degree of satisfaction among policymakers,” Pang added, suggesting that further cuts would likely play a “supporting role” rather than serve as the centerpiece of China’s stimulus efforts.

Nomura analysts also warned that policymakers might need to ramp up support in the second half of 2025 if momentum slows once businesses exhaust earlier frontloaded orders designed to hedge against trade uncertainty.

Shifting Focus Toward Currency Stability and New Growth Engines

Chinese officials have also emphasized their growing confidence in stabilizing financial markets. At a major financial forum in Shanghai this week, Zhu Hexin, head of the State Administration of Foreign Exchange (SAFE), stated that China’s capacity to counteract foreign exchange volatility has “significantly improved.”

PBOC Governor Pan Gongsheng echoed this sentiment while also highlighting Beijing’s ambitions to elevate the international role of its digital yuan (e-CNY). Pan advocated for a multi-polar global currency system, challenging the U.S. dollar’s dominance in global trade and finance.

Expanding the reach of the digital yuan is increasingly viewed as a long-term strategy to insulate China’s financial system from external pressures while deepening its influence across global financial markets.

Cautious Growth Optimism Amid Ongoing Global Risks

Although the immediate trade truce has reduced some near-term downside risks, broader challenges still loom for China’s economy:

• Youth unemployment remains elevated, with jobless rates among younger workers exceeding 15% in many urban centers.
• The property sector remains fragile, with major developers still struggling under massive debt burdens.
• Exports have shown some resilience but remain vulnerable to shifting global demand and geopolitical tensions.
• Private sector investment growth remains tepid, reflecting weak business confidence.

Despite these headwinds, the improved trade environment and recent currency stabilization give Beijing more policy options heading into the second half of 2025. However, most economists believe Chinese authorities will remain highly deliberate in deploying further monetary or fiscal stimulus, preferring to conserve ammunition while carefully monitoring domestic and global developments.