China's drastic economic "blow", what is the hidden message behind it?

The People's Bank of China (PBOC) has just announced a 1-year loan prime rate (LPR) cut by 10 basis points to 3%. The 5-year LPR has been cut similarly to 3.5%.

Experts say this is the first time these rates have been cut since October 2024. Most existing and new loans in China are calculated based on the one-year LPR, while the five-year LPR affects home loan rates.

Previously, China's leading state-owned banks also announced a reduction in deposit interest rates by 5-25 basis points, such as Industrial and Commercial Bank of China (ICBC), Agricultural Bank of China (AB), China Construction Bank (CCB), and Bank of China. Deposit interest rates at these banks are currently 0.05-0.95%. Smaller banks are expected to make similar moves.

Today's announcement was part of a package of measures announced by PBOC Governor Pan Gongsheng and other Chinese financial officials earlier this month, ahead of U.S.-China talks in Switzerland.

"However, we still think Beijing will face challenges in achieving its growth target of around 5% unless it launches a massive stimulus package. Right now, it is just under less pressure to launch stimulus and reform," said Ting Lu, chief economist at Nomura.

Headquarters of the People's Bank of China (Photo: Reuters).

After the US and China announced their decision to sharply reduce tariffs on each other's goods for 90 days, a series of international investment banks raised their forecasts for China's GDP growth this year, while reducing expectations for additional stimulus measures from Beijing.

Nomura raised its second-quarter GDP growth forecast for 2025 to 4.8% from 3.7%, and revised its full-year growth estimate to 3.7% from 3.5%. This forecast is still significantly lower than China's ambitious growth target for the whole of 2025 of around 5%.

On the other hand, the world’s second-largest economy is still struggling with persistent deflationary pressures. China’s wholesale prices recorded their worst decline in six months in April, while consumer prices continued to fall for a third straight month.

However, Morgan Stanley's team of experts predicts that China will deploy additional stimulus measures on a smaller scale and at a slower pace than the scenario before the two superpowers "ceasefire" in trade.

Morgan Stanley points out that current US tariffs on Chinese goods are still much higher than they were before President Donald Trump's second term.

The bank warned that deflation in China could persist, as high tariffs would dampen demand from US buyers, exacerbating the problem of overcapacity in the domestic market.

Source: https://dantri.com.vn/kinh-doanh/trung-quoc-ra-don-kinh-te-quyet-liet-thong-diep-ngam-phia-sau-la-gi-20250520130527692.htm