China's Central Bank Plans to Cut Interest Rates This Year - FT
Forex - The People's Bank of China plans to lower interest rates this year as it makes a historic shift towards a more orthodox monetary policy to align with the Federal Reserve and the European Central Bank. In a statement, the central bank indicated that it is likely to reduce rates from the current 1.5 percent level at “an appropriate time” in 2025. The bank added that it will prioritize the “role of interest rate adjustments” and will move away from “quantitative targets” for credit growth, signaling a transformation in China’s monetary policy.
Like most central banks, such as the Fed, the PBoC uses a single policy variable—the benchmark interest rate—to influence credit demand and economic activity. In contrast, the PBoC not only sets a multitude of different interest rates but also provides informal guidance to banks on how much they should expand their loan portfolios.
While this type of guidance has been a critical tool for managing the economy for decades—channeling loans into high-growth sectors like manufacturing, technology, and real estate—officials within the PBoC now believe urgent reforms are necessary. Richard Xu, Morgan Stanley's Chief China Financial Analyst, stated, “Interest rate reform will likely become the real focus of the PBoC in 2025. China's economic development urgently needs to shift away from a mindset focused solely on expanding the market size of [banks' loan portfolios].”
Credit demand has collapsed due to a prolonged slowdown in the real estate market. The PBoC is also concerned that its credit growth targets lead to reckless lending without due regard for risk, which could result in waste in the long run. The central bank stated, “In line with the requirements for high-quality development, these quantitative targets have been gradually removed in recent years. The PBoC will place greater emphasis on the role of interest rate control and improve the formation and transmission of market-oriented interest rates.”
Participants noted that PBoC Governor Pan Gongsheng and his predecessors, Yi Gang and Zhou Xiaochuan, pressed for risk-based pricing of loans in recent meetings with officials from some of China’s largest banks. Bankers attending the meetings warned about potential confusion in long-term loan pricing due to the market being accustomed to the PBoC's guidance, highlighting the challenges of transitioning to the new system.
For international investors, if the PBoC succeeds, China's monetary policy will begin to resemble the systems they are accustomed to in the US, Europe, or Japan.