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China central bank eases policy ahead of US trade meeting

China central bank eases policy ahead of US trade meeting
Cargo containers at a shipping yard. Image used for illustration purposes. PHOTO/Pexels

China’s central bank governor on Wednesday flagged interest rate cuts and a liquidity injection into the banking system, among other monetary policy easing measures aimed at mitigating the impact of a trade war with the United States.

The announcement comes shortly after U.S. and Chinese officials said U.S. Treasury Secretary Scott Bessent and chief trade negotiator Jamieson Greer will meet China’s top economic official He Lifeng in Switzerland this weekend for talks.

China’s central bank will lower the borrowing cost of its seven-day reverse repurchase agreements, its benchmark interest rate, by 10 basis points (bps) to 1.40%, effective May 8. Other interest rates will drop in line with the key rate.Expand article logo 

The amount of cash that banks must hold as reserves, known as the reserve requirement ratio (RRR), will also be cut by 50 bps, bringing the average level to 6.2%. The People’s Bank of China’s Governor Pan Gongsheng told a news briefing the first RRR cut since September last year will release 1 trillion yuan ($138 billion) in liquidity.

Stronger yuan gives China room to ease monetary policy

Pan also said the central bank will enhance some structural lending tools.

Policymakers have been flagging monetary policy easing moves since late 2024, but had held fire while the yuan currency was under pressure, fearing capital outflows, analysts said.

A slightly stronger yuan in recent days may have given the central bank an opening.

“A weaker dollar certainly gives China more room to make monetary adjustments,” said Xu Tianchen, senior economist at the Economist Intelligence Unit.

“I don’t have very high expectations of the credit impact of these measures,” said Xu, but added they “inject renewed confidence, which will support the stock market.”

Washington’s triple-digit tariffs on imports from China have started to bite into the growth prospects of the world’s second-largest economy.

Factory activity contracted at the fastest speed in 16 months, while services activity expanded at the slowest pace in seven months in April.

Flags of the United States and China displayed during a diplomatic event. PHOTO/@ChineseEmbinUS/X

China is taking measures to support its economy and markets because of the trade war with the United States, said Xing Zhaopeng, senior China strategist at ANZ.

“The domestic economy must be strong enough before (China) kicks off any protracted trade negotiations,” Xing said.

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Reuters

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