China’s Central Bank Keeps Loan Prime Rates Unchanged Amid Slowing Economic Growth
China’s central bank, the People’s Bank of China (PBOC), has decided to keep its loan prime rates unchanged, with the 1-year and 5-year loan prime rates remaining at 3% and 3.5%, respectively, for the eighth consecutive month. This decision comes as the country’s economy is experiencing a slowdown, with a growth rate of 4.5% year-on-year in the final quarter of 2025, the slowest pace since the reopening from stringent Covid curbs in late 2022.
The nominal GDP, a key indicator of corporate profitability and household salaries, has remained below 4% for the third consecutive year, coming in at 3.8% in the fourth quarter, according to economists at Barclays. The GDP deflator, which highlights changes in the prices of goods and services, has stayed negative for the 11th quarter, with the bank expecting deflation to persist throughout this year. Retail sales growth fell to a 3-year low of 0.9% in December, as household confidence continued to be battered by a years-long housing slump, a bleak job market, and entrenched deflation.
Economic Challenges and Policy Response
China’s state planner has announced that policymakers will continue to implement “more proactive fiscal policies” and “moderately loose monetary policy” to support a recovery in prices. The PBOC has also taken steps to support targeted sectors, including reducing the interest rates on its structural monetary policy tools by 0.25 percentage point and setting up a dedicated relending program for private firms. Additionally, the minimum down-payment ratio for commercial property mortgages will be lowered to 30% to help reduce inventory in the real estate market.
New bank loans shrank to a 7-year low of 16.27 trillion yuan ($2.33 trillion) in 2025, according to official data compiled by financial service provider Wind Information, underscoring sluggish borrowing demand and piling pressure on the government to provide more stimulus. Deputy Governor Zou Lan has stated that there is “still room” to reduce both the reserve requirement ratio and policy rates this year, while acknowledging that conditions have improved for further monetary easing.
Monetary Policy and Currency Movements
The yuan’s recent appreciation has created space for policy rate cuts, with the Chinese offshore yuan gaining over 1% against the dollar in the past month, breaching the key threshold of 7 per dollar last month for the first time since May 2023. The offshore yuan was little changed on Monday, trading at 6.9571 against the greenback, according to LSEG, while the onshore yuan was 6.9612 per dollar. China’s 10-year government bond yield dipped modestly to 1.834%.
Economists at Goldman Sachs expect the PBOC to cut the reserve requirement ratio by 50 basis points and the policy rate by 10 basis points in the first quarter. China’s manufacturing and exports have held up well, with industrial production rising 5.9% for the entire year of 2025 and exports climbing 5.5%, taking its trade surplus to a record of early $1.2 trillion.
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