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China’s 5.4% growth rate in the first three months of the year is as impressive as it is disorienting.
On Tuesday, the People’s Bank of China cut its key lending rates by 10 basis points. Governor Pan Gongsheng lowered the one-year loan prime rate to 3.0% from 3.1%, and the five-year rate to 3.5% from 3.6%.
Not big moves, but symbolic ones as U.S. President Donald Trump’s trade war takes an increasing toll on Chinese confidence.
So far, Trump’s tariffs haven’t tackled Asia’s biggest economy in the ways the White House had hoped. In fact, China even grew above its 5% target in the first quarter while the U.S. shrank 0.3%.
Yet data releases Monday flashed telltale signs of the high cost of economic uncertainty — and a rising one at that. From softening data on retail sales, fixed asset investment, property prices, industrial production and other sectors, not knowing where tariffs will be six months from now is having a noticeable chilling effect.
It’s nice that Trump has, for now, pared his 145% China tax to 30%. But two caveats stand out here.
One, this climbdown could be short-lived if Chinese leader Xi Jinping doesn’t offer Trump a slew of concessions in bilateral trade talks. And Beijing watchers agree that’s rather unlikely. Given the harsh rhetoric coming from Trump World, Xi can’t be seen as bowing to Washington.
Two, Trump’s 30% level puts the tax in the neighborhood of the 1930s Smoot-Hawley Tariff Act that deepened the Great Depression. That 79% reduction is a step in the right direction, but it’s still a formidable headwind for an economy that came into the Trump 2.0 era with serious preexisting conditions.
Prior to January 20, China was struggling with a giant property crisis that’s fueling deflation, near-record youth unemployment, a rapidly aging population and local governments dealing with trillions of dollars of debt. These challenges and others are undermining household demand.
Even though China appears to be standing its ground, the tariffs are biting. And increasingly so.
The PBOC’s rate cuts are sure to accelerate as deflation becomes more ingrained. Chinese prices aren’t falling precipitously. But factory-gate prices falling for 31st consecutive months, as they are in China, is never good. In April alone, producer prices dropped 2.7% year on year. Consumer prices are now down for three straight months.
The PBOC’s rate cut was its first since October, when it moved by 25 basis points. What’s changed since then is easing trade-war tensions and a stronger yuan. For months, fears that the yuan might fall too far, too fast had Pan avoiding rate cuts.
A weaker yuan might make it harder for property developers to pay back dollar-denominated debt, causing a new cycle of defaults. It might squander years of efforts to reduce leverage and bad lending decisions. It also would surely enrage the Trump White House, prompting it to supersize tariffs.
“Today’s reductions … probably won’t be the last this year,” says Zichun Huang, China economist at Capital Economics.
Until then, Huang says, “the rate cuts will reduce interest payments on existing loans, taking some pressure off indebted firms. It will also reduce the price of new loans. But modest rate cuts alone are unlikely to boost loan demand or wider economic activity meaningfully.”
In other words, the PBOC is in for a busy second half of 2025. So will Xi’s fiscal policymakers.
We still believe it will be quite challenging for Beijing to achieve its ‘around 5%’ growth target unless it rolls out a sizable stimulus package,” says Ting Lu, chief China economist at Nomura. “Considering the respite on the trade war, Beijing might be under less pressure to introduce the necessary stimulus and reforms.”
But given China’s preexisting conditions and the fact that a 30% tariff on all shipments to the globe’s biggest economy is no joke. Even worse than the current tariff is confusion about the level of levies down the road. Economic uncertainty comes at a very high price.