In a move to fortify its economy against ongoing trade tensions with the United states, China’s central bank, the People’s Bank of China (PBOC), has announced a reduction in both its policy interest rate and deposit reserve rate. The announcement, made by PBOC Governor pan Gongsheng on May 7, signals a proactive approach to maintaining economic stability.

Key Policy Adjustments

• Seven-Day Reverse Repo Rate: lowered from 1.5% to 1.4%.
• Deposit Reserve Rate: Reduced by 0.5 percentage points.

These measures are designed to lower borrowing costs and inject liquidity into the financial system.

Strategic context

The PBOC’s decision comes shortly before planned trade talks between the U.S. and China, the first since the U.S. imposed additional tariffs on Chinese imports. The press conference announcing the rate cuts was also attended by President Wu Qing of the Securities Regulation and Management Committee and Director Li Yunze, Director General of the National Bureau of Financial Supervisory and Management, underscoring the coordinated effort to address economic challenges.

Liquidity Injection and Policy Goals

The reduction in the deposit reserve ratio is projected to provide approximately 1 trillion yuan (approximately 19.8 trillion yen) in long-term liquidity. This move is part of a broader set of 10 policies put forward by President Ban, which include relending tools and lowering interest rates on loans to policy banks.

Expert Analysis

Analysts suggest that China’s actions are not merely reactive but strategic. This is not just mitigation. China is moving to lay the foundation for resilience, reform and retaliation if necessary, said Chal Chanana, chief investment strategist at Saxo Markets. He added, As well as expanding liquidity and credit, efforts focused on technology, consumption and elderly care also show extensive attempts to support the structural leading role of the Chinese economy.

Addressing Economic Headwinds

The decision reflects the authorities’ commitment to supporting China’s economy, which has been impacted by the trade war with the U.S. Economists have warned that increased tariffs could severely disrupt trade between the two countries, leading to expectations for china to implement stronger stimulus measures.

Policy Consistency and Shift

President Ban has reiterated a moderately accommodative monetary policy, with plans to ensure ample liquidity and provide relatively low-interest funding. This follows a similar move in September of the previous year,indicating a consistent approach to monetary easing.This easing suggests that China is taking serious measures to stimulate consumption and maintain growth centered on domestic demand, especially given the potential impact of U.S. tariffs.

For the PBOC, which has been prioritizing defense of the yuan and suppressing speculation in the bond market, this move represents a notable shift in policy.

Economic Resilience and Growth Targets

Without a strengthened stimulus package, the economy could remain sluggish, potentially jeopardizing the achievement of this year’s gross domestic product (GDP) growth target of around 5%.At a Communist Party Central Political Bureau meeting in late April, the Supreme Leader announced a policy of making full preparations for emergency measures to deal with rising external shocks.

Market Outlook

Francis Chun, managing director and interest rate strategist at Overseas Chinese Bank (OCBC), analyzed the announcement, stating, This shows that it is indeed a comprehensive initiative that not onyl supports liquidity, but also stimulates the market and the economy in general. He further added, If we can strengthen the economy, it will also be a trump card in fighting tariffs.