[ANALYSIS] China loosens monetary policy in a bid to boost the economy ahead of US-China trade talks this week

OVERVIEW:

Overnight, PBoC Governor Pan announced

• 
  RRR: Cut by 50bps effective May 15th; will release about CNY 1tln in liquidity.


• 
  Policy Interest Rate (7-day Reverse Repo): Cut by 10bps to 1.40% (from 1.50%), effective May 8th.


• 
  Standing Lending Facility (all tenors): Cut by 10bps, effective May 8th.


• 
  Loan Prime Rate (implied): Expected cut of 10bps (as a result of the policy rate cut).


• 
  Personal Housing Provident Fund Loan Rate: Cut by 25bps.


• 
  Re-lending Rates (for elderly care and service consumption): Cut by 25bps, effective today; New CNY 500bln quota set up.


• 
  Structural Policy Tools Interest Rates: Cut by 25bps, effective today.


• 
  Monetary Policy Tools to Support Capital Markets: Total quota raised to CNY 800bln.

*Note: The MLF was not mentioned but will likely by moved by 10bps given the cut to the RRR and subsequent effect on the Loan Prime Rate

Pan also stated that China will use multiple policy tools to make dynamic adjustments and will guide commercial banks to lower deposit rates.

CAPITAL MARKETS:

China’s financial regulator said:

• Will expand the pilot scheme to allow insurance companies to invest in stock markets and will take further steps to stabilise the property market.


• Will guide financial institutions to maintain steady financing support for the property market.


• Will guide banks to provide financing support for foreign trade companies affected by US tariffs.


• Will approve CNY 60bln in long-term insurance funds into the stock market.

TARIFFS/TRADE:

Commentary

• China’s securities regulator said US tariff policy has brought great pressure to China’s capital markets but added that they will consolidate good momentum in capital markets and that China will roll out reform measures for tech boards.


• Furthermore, they will forcefully promote long-term capital into the stock market and said ample preparations have been made for dealing with external shocks.

Trade Talks

• China's Ministry of Commerce confirmed US-China trade talks with Vice Premier He Lifeng to visit Switzerland from May 9th-12th and will visit France from May 12th-16th for economic and financial dialogue.


• US President Trump said China wants to negotiate and will meet at the right time, while he added they're losing nothing by not trading with China. Furthermore, he said China's doing no business right now and its economy is suffering from a lack of US trade.


• US Treasury Secretary Bessent and Trade Representative Greer are to meet with China's lead representatives on economic matters later this week in Switzerland, while Bessent confirmed he is meeting the Chinese team on Saturday in Switzerland and said they agreed to talk on Saturday and will agree on Sunday what they are going to talk about.


• Bessent said his sense is this will be about de-escalation and said they have got to de-escalate before they can move forward, as well as noted that the US doesn’t want to decouple from China over textiles and similar goods but does want to decouple over strategic industries. Furthermore, he said trade frictions can go down, Americans can get fairer deals, and everything is on the table.

HOUSE VIEWS:

ING:

• “Overall, China's policy response after the escalation of the trade war has been quite calm and measured.”


• “After today's moves, we still think there’s room for additional policy easing if needed, given deflationary pressures and the risk of moderating growth. We are looking for another 20bp of rate cuts and 50bp of RRR cuts this year, and we expect that the next move might not come until after the US Federal Reserve resumes rate cuts.”


• “We anticipate that a de-escalation scenario could end up bringing tariffs back toward the original Liberation Day tariffs. This would be around 60%, consistent with President Trump’s original election-trail plans… The road ahead will likely remain long and uncertain.”

ANZ:

• "The domestic economy must be strong enough before (China) kicks off any protracted trade negotiations,”

Citi:

• Stimulus measures are tactical ahead of trade talks.


• "Timely domestic support could create more leverage for China,"

Bank of East Asia:

• “Investors may be more cautious that both sides may not be able to make a deal in the near term and that’s why Chinese policymakers need to roll out so many easing measures prior to the meeting.”

Saxo Markets

• “This isn’t just easing — it’s Beijing laying the groundwork for resilience, reform, and retaliation if needed,”


• This isn’t just a boost for liquidity and credit — the focus on tech, consumption, and elderly care signals a broader push to support structural drivers of the economy.”

Bloomberg Economists:

• “The monetary package is stronger than we expected. It is a powerful signal that policymakers are committed to boosting sentiment and shoring up growth. The PBOC’s steps get the ball rolling. It’s important that the government follows up — fiscal measures are more central for stabilizing the economy, and we anticipate more measures to come.”

07 May 2025 - 08:52- ForexGeopolitical- Source: Newsquawk