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.<\/p>\n
In a statement to the Financial Times<\/em>, 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.<\/p>\n 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.<\/p>\n While this guidance has been the most important tool in managing the economy for decades \u2013 as credit has been channeled to high-growth sectors such as manufacturing, technology, and property \u2013 officials within the PBoC now believe reform is urgent.<\/p>\n “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.<\/p>\n 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.<\/p>\n “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.”<\/p>\n 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.<\/p>\n 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.<\/p>\n 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.<\/p>\n 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.<\/p>\n 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.<\/p>\n 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.<\/p>\n 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.<\/p>\n 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.<\/p>\n 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.<\/p>\n 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.<\/p>\n Without such guidance, “market participants may find themselves guessing what will happen next,” said Haibin Zhu, China economist at JPMorgan Chase.<\/p>\n","protected":false},"excerpt":{"rendered":" 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 […]<\/p>\n","protected":false},"author":1,"featured_media":7077,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"ep_exclude_from_search":false,"footnotes":""},"categories":[4],"tags":[529,1664,189,2440,4545,4544],"class_list":["post-7076","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-asia","tag-china","tag-chinese-economy","tag-fed","tag-interest-rate","tag-morgan-stanley","tag-pboc"],"yoast_head":"\n