China unveiled a series of stimulus measures aimed at mitigating the economic impact of the ongoing trade war with the United States. These measures include interest rate cuts and a significant liquidity injection, signaling Beijing’s commitment to boost economic growth amid rising pressures.
The announcement follows news that U.S. Treasury Secretary Scott Bessent and chief trade negotiator Jamieson Greer will meet with China’s top economic official, He Lifeng, in Switzerland this weekend. This meeting represents the first opportunity for both nations to de-escalate tensions after a prolonged period of tariff disputes that have disrupted global markets and supply chains.
Recent data indicates that the Chinese economy is already feeling the effects of these tariffs, with factory activity contracting in April at its fastest rate in 16 months. Analysts are increasingly concerned about the potential implications for the job market and the growing deflationary pressures as Chinese exporters face challenges in accessing their largest market.
“The domestic economy must be strong enough before China kicks off any protracted trade negotiations,” Reuters reported, citing Xing Zhaopeng, senior China strategist at ANZ, reflecting the necessity for a robust domestic foundation before engaging further in trade discussions.
Read more: China eases tariffs on selected U.S. goods to mitigate economic strain
Investor optimism
Following the announcement of the stimulus measures, Chinese stocks saw a positive response as investors expressed optimism regarding the easing steps and the impending trade talks. Analysts from Citi noted that “the tariff impact had started to surface,” suggesting that the stimulus measures might be tactical in nature, aimed at strengthening China’s position ahead of the discussions.
As part of the measures, the People’s Bank of China (PBOC) will lower the borrowing costs of its seven-day reverse repurchase agreements. Effective May 8, the benchmark interest rate will decrease by 10 basis points to 1.40 percent. Additionally, the reserve requirement ratio (RRR) will be cut by 50 basis points from May 15, reducing the average level to 6.2 percent and injecting approximately 1 trillion yuan ($138 billion) into the economy.
Enhancing market liquidity
PBOC Governor Pan Gongsheng emphasized that this RRR cut is the first since September of the previous year and will significantly increase market liquidity. He also announced that the central bank would establish low-cost relending facilities aimed at supporting technology-related investments and elderly care services, while enhancing existing tools designed to aid agriculture and small businesses.
In a related effort, the government is taking steps to assist A-share listed companies affected by tariffs and is expanding a pilot scheme that allows insurance companies to invest in the stock market by an additional 60 billion yuan ($8.31 billion).
Moreover, the PBOC will reduce mortgage rates under the nation’s housing provident fund by 25 basis points, lowering rates for first-time homebuyers to 2.6 percent from 2.85 percent. The measures also include gradually reducing the reserve requirements for auto financing firms to zero from the current 5 percent, which is expected to stimulate the automotive market.
Despite these initiatives, some analysts caution that the impact on domestic credit demand may be limited, as borrowing has shown insensitivity to interest rate changes. Tianchen Xu, a senior economist at the Economist Intelligence Unit, noted that while these measures are significant, they may not immediately translate into increased borrowing or consumption.
Continued support for SMEs
As the Chinese government continues to roll out support for small and medium enterprises and the private sector, more measures are anticipated in the near future. “Policymakers are likely now privy to some of the early data on how the economy is being impacted by the tariff shock,” remarked Lynn Song, chief economist for Greater China at ING, indicating that further policy easing may be on the horizon.
The announcement of these measures comes as the Chinese offshore yuan shows signs of stability, hovering around the key 7.20 threshold after previously weakening to a record low of 7.4287 per U.S. dollar. Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, noted that the recent depreciation pressures on the yuan have eased, allowing the PBOC to act without the fear of exacerbating capital outflows.
A pivotal moment ahead
Looking ahead, the planned talks between Chinese Vice Premier He Lifeng and U.S. Treasury Secretary Scott Bessent could signify a pivotal moment in the ongoing trade conflict that has significantly affected the global economy. As both nations prepare for negotiations, the stakes are high for achieving a resolution to the tariffs that have disrupted trade between the world’s two largest economies.
