China has lowered interest rates and boosted bank lending to combat tariffs.
On Wednesday, China’s central bank announced a reduction in interest rates and an increase in liquidity within the financial system, aiming to strengthen the economy amid ongoing trade tensions with Washington. The Chinese central bank announced a reduction in the reserve requirement ratio, which dictates the reserves that banks must maintain, by 0.5 percentage points effective May 15. The reduction will inject approximately one trillion yuan, or $139 billion, of liquidity into the financial system, facilitating increased lending capacity for banks. The central bank had previously reduced the ratio in September 2024. The central bank has reduced a key policy rate by 0.1 percentage point.
Following the announcement, Hong Kong’s Hang Seng Index experienced an increase of over 1.5%, while shares in mainland China also saw gains. Markets were responding to the potential for formal trade discussions between the U.S. and China. Treasury Secretary Scott Bessent and U.S. Trade Representative Jamieson Greer are set to travel to Switzerland on Thursday for discussions with Beijing’s chief economic envoy.
The economic measures unveiled in Beijing on Wednesday represent the initial substantive actions taken since President Trump imposed tariffs on Chinese goods in April. Beijing committed to enacting measures aimed at bolstering growth late last month in response to the challenges posed by tariffs. The Chinese economy has yet to experience the complete impact of the tariffs. The economy expanded by 5.4% in the first quarter, driven by a surge in exports directed towards the United States. In March, exports experienced a notable increase of 12.4% compared to the same month last year.
However, the discomfort is starting to become apparent. The volume of maritime traffic from China to the United States is experiencing a significant decline as American importers retract their orders. Chinese manufacturing facilities are placing employees on leave, while a measure of new export orders declined in April, reaching its lowest point since 2022. Chinese officials have conveyed optimism regarding the attainment of the country’s 5% growth target for this year; however, analysts anticipate a deceleration in growth to 4% or below. According to economists, the government’s initiatives aimed at stimulating the domestic economy have thus far been rather constrained.
