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China’s central bank plans to cut interest rates this year

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The People’s Bank of China (PBoC) plans to cut interest rates this year as it makes a historic shift towards a more orthodox monetary policy to align with the U.S. Federal Reserve and the European Central Bank.

In a statement to the Financial Times, the PBoC said it is likely to cut interest rates from the current 1.5 per cent level “at an appropriate time” in 2025. The bank added that it would prioritize “the role of interest rate adjustments” and move away from “quantitative targets” for credit growth, which would mean a transformation in Chinese monetary policy.

Most central banks, like the Fed, have a single policy variable, the benchmark interest rate, which they use to influence credit demand and activity in the economy. In contrast, the PBoC not only sets a large number of different interest rates but also provides informal guidance to banks on how much they should expand their loan books.

While this guidance has been the most important tool in managing the economy for decades – as credit has been channeled to high-growth sectors such as manufacturing, technology, and property – officials within the PBoC now believe reform is urgent.

“Interest rate reform will probably be the real focus of the PBoC in 2025,” said Richard Xu, chief China financial analyst at Morgan Stanley in Hong Kong. “China’s economic development urgently needs to move away from a mindset that focuses solely on expanding the market size [of banks’ loan books],” he added.

Loan demand has collapsed due to a prolonged slowdown in the property market. The PBoC also fears that loan growth targets will lead to indiscriminate lending without considering risk, which in the long run means waste.

“In line with the requirements of high-quality development, these quantitative targets have been phased out in recent years,” the central bank said. “The PBoC will pay more attention to the role of interest rate control and improve the formation and transmission of market-oriented interest rates.”

As part of the regime change, the PBoC announced last year that its main policy instrument would be the seven-day reverse repo rate instead of the interest rates it has used to date.

The reduced emphasis on credit growth targets could rein in overcapacity in China, which has led to domestic bad debts and disruptions in global industries such as steel.

But the central bank is struggling to implement the change in interest rates because the government wants to channel money into the high-tech and manufacturing sectors, which were easier under the old credit expansion system.

Even as it tries to make a structural change in policy, the PBoC is also under pressure to revitalize the Chinese economy. The central bank has cut the seven-day interest rate twice and the five-year rate, which affects mortgage prices, three times through 2024 as part of its most aggressive stimulus package since the Covid-19 pandemic.

These moves came in the context of President Xi Jinping’s commitment to achieve 5 percent economic growth despite problems in China’s property sector and trade tensions with the U.S.

PBoC governor Pan Gongsheng and his predecessors Yi Gang and Zhou Xiaochuan pushed for risk-based pricing of loans in recent meetings with officials from some of China’s largest banks, according to participants.

Bankers attending the meetings warned of possible confusion in pricing long-term loans as the market is used to the PBoC’s guidance, noting the difficulty of switching to the new system.

For international investors, if the PBoC succeeds, Chinese monetary policy will start to resemble the system they are used to in the U.S., Europe, or Japan.

For the first time in two decades, the central bank also bought government bonds on the open market in 2024 to inject money into the financial system, following the Fed’s policy.

Analysts said the PBoC still lacks some key ingredients for an interest-rate-based system, such as a program of routine, public meetings to make policy decisions.

Without such guidance, “market participants may find themselves guessing what will happen next,” said Haibin Zhu, China economist at JPMorgan Chase.

ASIA

China tries to reassure markets as stocks and renminbi fall

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China’s regulators sought to calm markets on Monday as stocks and the renminbi experienced a shaky start to 2025, influenced by weak economic data and geopolitical uncertainty ahead of Donald Trump’s return to the U.S. presidency.

Mainland China’s CSI 300 index dropped by 0.2% on Monday, marking a 4.1% decline in the first three trading days of the year, making it Asia’s worst-performing major index so far in 2025. Small-cap stocks in the CSI 2000 index fell 6.6% since the year’s start. Meanwhile, Hong Kong’s Hang Seng index dipped by 0.4% on Monday, with a year-to-date decline of 1.2%.

Amid these declines, Chinese stock market regulators convened meetings with international investors, and the central bank reaffirmed its commitment to stabilizing the currency. This occurred alongside concerns about Trump’s plans to increase tariffs on Chinese exports.

“Right now, everyone is wondering what Trump 2.0 will bring,” said Jason Lui, head of Asia-Pacific equity and derivatives strategy at BNP Paribas. “It’s reasonable for investors to take some profit,” he added.

The renminbi fell to a 15-month low of Rmb7.33 against the dollar on Monday, despite the People’s Bank of China keeping the daily trading band for the onshore renminbi unchanged. Analysts linked the currency’s downward pressure to corresponding weaknesses in Chinese stocks. Kevin Liu, a strategist at CICC, attributed the pressure to weak manufacturing data, the dollar index reaching a two-year high, and the anticipated effects of Trump’s presidency.

In an effort to reassure investors, the Shanghai and Shenzhen stock exchanges emphasized the resilience and solid fundamentals of China’s economy during a weekend meeting with foreign institutions. They welcomed feedback and suggestions to address concerns about Chinese stocks, as outlined in a statement on Sunday.

On Monday, the central bank maintained its daily midpoint fixing rate for the renminbi at Rmb7.19, allowing it to trade within a 2% range. The state-owned Financial News stressed the central bank’s readiness to prevent excessive exchange rate volatility, emphasizing its “sufficient tools” to maintain currency stability.

Investor sentiment remained weak as long-term government bonds continued to attract buyers. Concerns over domestic consumption led to speculation that the central bank might further ease monetary policy. The yield on 10-year Chinese government bonds fell to 1.61% on Monday, nearing an all-time low.

Despite Beijing’s promises to boost domestic consumption following a prolonged property crisis, the year began on a subdued note. The Chinese People’s Congress is set to meet in March to outline its economic policy agenda for what analysts expect will be a challenging year.

Winnie Wu, chief China equity strategist at Bank of America, highlighted the need for policies aimed at stimulating consumption, supporting the private sector, and addressing youth unemployment. “In terms of the fundamental things to look for in 2025, we think investors need to see more on consumption,” Wu said.

Despite the rough start, analysts noted that Chinese stocks rebounded strongly in 2024, with the CSI 300 gaining 14.7% over the year. “We think the worst decline is over,” Wu concluded.

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ASIA

Vietnam GDP growth accelerates in 2024 driven by strong exports

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Vietnam’s gross domestic product (GDP) grew 7.09% in 2024, reaching $476.3 billion, up from a 5.05% increase in 2023, according to government data released on Monday. The growth was fueled by strong exports and robust foreign investment inflows.

GDP growth in the fourth quarter was 7.55%, marking the fastest quarterly expansion in over two years, the General Statistics Office (GSO) reported.

The Southeast Asian country, known as a regional manufacturing hub, capitalized on a recovery in global consumption despite enduring Asia’s strongest typhoon last year.

“This is a positive result amid challenges, including natural disasters, and lays a good foundation for growth in 2025,” Nguyen Thi Huong, head of the Statistics Office, stated during a press conference. The GSO report highlighted that exports in 2024 increased by 14.3% year-on-year, reaching $405.53 billion, driven by electronics, smartphones, clothing, and agricultural products.

Conversely, imports grew by 16.7% to $380.76 billion, resulting in a trade surplus of $24.77 billion.

The strong economic rebound was also supported by government efforts to boost coal imports for power generation, preventing electricity shortages seen in prior years. Coal imports rose 24.8% year-on-year to 63.8 million tonnes, while electricity generation grew 9.6%, reaching 293.3 billion kilowatt-hours.

Foreign investment inflows into Vietnam increased 9.4%, totaling $25.35 billion in 2024. Industrial production output rose 8.4%, while average consumer prices increased by 3.63%.

Vietnam has set an ambitious GDP growth target of 6.5% to 7.0% for 2025, with Prime Minister Pham Minh Chinh expressing optimism for an 8.0% growth rate.

“Going forward, Vietnam will actively monitor monetary policies, stabilize exchange rates, and closely watch major trading partners to implement timely measures,” Huong added.

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ASIA

South Korea’s anti-corruption agency seeks arrest of suspended president Yoon Suk Yeol

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South Korea’s Corruption Investigation Office for Senior Officials (CIO) has requested police to arrest suspended President Yoon Suk Yeol, following a failed attempt to detain him last week after a confrontation with his security detail.

On Monday, the CIO announced that it had sent a letter to the police on Sunday night, authorizing them to execute an arrest warrant against Yoon. The president was suspended from office pending a decision by the Constitutional Court regarding his impeachment.

The request comes after the CIO abandoned an attempt to arrest Yoon on Friday due to strong resistance from his security guards. After more than five hours of confrontation, the agency withdrew from the president’s residence, stating it was “almost impossible” to detain him.

The National Police Agency has identified legal issues with the CIO’s request and plans to discuss the matter further. Baek Dong-heum, the director overseeing the case, stated at a press briefing, “After examining the letter internally, we found that it is legally controversial. We reaffirm that we are investigating the case in accordance with the law and principles under the joint investigation team [with the CIO].” Baek did not elaborate on the specific legal concerns.

Local media reports indicate that Yoon’s lawyers filed a request with the Seoul District Court to cancel the search warrant, arguing that the CIO lacked the authority to investigate sedition charges. However, the court rejected the request on Sunday, ruling that the agency could include the charge as it relates to alleged misconduct under investigation.

The current arrest warrant is set to expire at midnight, but the CIO has stated it will seek an extension from the court.

Yoon was suspended from office on December 14 after National Assembly lawmakers voted to remove him following his declaration of martial law, which triggered significant political turmoil in South Korea. The Constitutional Court is now deliberating whether to uphold or reject the impeachment, a process that could take up to six months.

The CIO and police formed a joint investigation team last month to probe allegations that Yoon incited riots by declaring martial law on December 3 and deploying troops to the National Assembly and the National Election Commission. Yoon withdrew the declaration the following morning after lawmakers voted against it.

Over the weekend, Yoon’s supporters gathered outside his residence in Seoul’s Yongsan district, waving U.S. and South Korean flags and pledging to protect him. Meanwhile, thousands of protesters demanded his arrest.

The CIO asked Acting President Choi Sang-mok to order Yoon’s security service to execute the arrest warrant. However, Choi declined, citing the need to remain neutral in the case. Choi, who also serves as deputy prime minister and finance minister, was appointed by Yoon.

In a message to reporters, Choi stated, “Government officials should not be harmed in this difficult situation. I ask the authorities to ensure that citizens and officials are not harmed in the process of enforcing the law.”

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