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The People's Bank of China plans to cut interest rates this year as part of a historic shift towards more conventional monetary policy to bring it closer in line with the US Federal Reserve and the European Central Bank.
In comments to the Financial Times, China's central bank said it was likely to cut interest rates from the current level of 1.5 percent “at the appropriate time” in 2025.
He added that he would prioritize “the role of interest rate adjustments” and move away from “quantitative targets” for loan growth in what could amount to a shift in Chinese monetary policy.
Most central banks, such as the Federal Reserve, have only one policy variable, the benchmark interest rate, which they use to influence demand for credit and activity in the economy.
the People's Bank of China By contrast, it not only sets a large number of different interest rates, but also provides informal guidance to banks on how much to expand their loan books.
While this guidance was its most important tool in management economy For decades – with loans directed at high-growth sectors such as manufacturing, technology and real estate – officials within the People's Bank of China have believed that reform is now urgent.
“Interest rate reform is likely to be the real focus for the People’s Bank of China in 2025,” said Richard Xu, senior China financial analyst at Morgan Stanley in Hong Kong. “China's economic development urgently needs to shift from a mindset that only focuses on expanding the market size (of banks' loan books).”
Demand for credit He collapsed Due to the slowdown in the real estate market for a long time. The People's Bank of China also fears that credit growth targets will lead to indiscriminate lending without regard to risk, which is wasteful in the long run.
“In line with the requirements of high-quality development, these quantitative targets have been phased out in recent years,” the central bank said. “The People's Bank of China will pay more attention to the role of controlling interest rates, and improve the formation and transmission of market-oriented interest rates.”
As part of the regime change, the People's Bank of China made clear last year that its main policy tool would be the seven-day reverse repo rate rather than the set of interest rates it has relied on until now.
Reducing the focus on credit growth targets could curb rampant overcapacity in China that has led to bad debt at home and disrupted global industries such as steel.
But the central bank is struggling to implement its shift towards interest rates because the government wants to direct money to the high-tech and manufacturing sectors, which is easier under the old system of credit expansion.
Even as it tries to make a structural change in policy, the People's Bank of China is also under pressure to revive the Chinese economy.
During 2024, as part of the most aggressive stimulus package since the Covid-19 pandemic, the central bank cut the seven-day interest rate twice and the five-year interest rate affecting mortgage rates three times.
These moves came in the context of President Xi Jinping's pledge to achieve 5 percent economic growth despite the turmoil in China's real estate sector and trade tensions with the United States.
The governor of the People's Bank of China, Pan Gongsheng, and his predecessors Yi Gang and Zhou Xiaoquan have pushed for risk-based pricing of loans in recent meetings with officials from some of China's largest banks, according to attendees.
Bankers participating in the meetings warned of the potential for confusion when pricing longer-term loans as the market becomes accustomed to the People's Bank of China's guidance, highlighting the challenge of transitioning to the new system.
For international investors, if the People's Bank of China succeeds, Chinese monetary policy will begin to resemble the system they are accustomed to in the United States, Europe, or Japan.
And for the first time in two decades, the central bank, too He bought government bonds In the open market to pump money into the financial system in 2024, in the same way the Fed conducts its policy.
Analysts said the People's Bank of China still lacks some basic components of a system based on interest rates, such as an announced schedule of routine meetings to make policy decisions.
Without such guidance, “market participants may find themselves guessing what will happen next,” said Haibin Zhu, a China economist at JPMorgan Chase.
