China's central bank has made a bold move, opting to maintain its benchmark lending rates despite the country's economic growth slowing down. This decision, announced from the PBOC building in Beijing, has sparked curiosity and controversy.
In a world where economic policies often follow a predictable path, China's central bank has chosen a different route. While many expected a broad policy easing to stimulate the economy, the authorities have decided to focus on targeted support for specific sectors.
The People's Bank of China (PBOC) kept its 1-year and 5-year loan prime rates unchanged at 3% and 3.5%, respectively. This decision marks the eighth consecutive month without any adjustments. The 1-year rate, which influences the majority of loans, and the 5-year benchmark, impacting mortgages, remain steady.
But here's where it gets interesting: China's economy, the second-largest globally, has lost its momentum. In the final quarter of 2025, it grew at a rate of 4.5% year-on-year, the slowest since the country reopened after stringent Covid restrictions in late 2022.
Erica Tay, Director of Macro Research at Maybank, sheds light on the situation. In nominal terms, China's GDP growth inched up to 3.8% year-on-year in the fourth quarter, indicating signs of deflation easing. The GDP deflator narrowed to -0.9% in the fourth quarter, suggesting tentative recovery signs in industrial profits and tax revenues. However, this also marks the 11th consecutive quarter of deflation in the economy.
Retail sales growth took a hit, falling to a three-year low of 0.9% in December. Household confidence remains low due to a prolonged housing slump, a challenging job market, and persistent deflation.
A team of economists at Nomura noted Beijing's growing concern about one of the worst domestic demand slowdowns this century.
Last week, the central bank took action, lowering interest rates on its structural monetary policy tools by 0.25 percentage points. The 1-year rate for various relending facilities was reduced to 1.25% from 1.5%, effective Monday. The PBOC also plans to establish a dedicated relending program for private firms and increase quotas for tech innovation loans, providing support to small and medium-sized private companies.
Deputy Governor Zou Lan hinted at further potential moves, stating there is still room to reduce both the reserve requirement ratio and policy rates this year. Economists at Goldman Sachs predict the PBOC will cut the reserve requirement ratio by 50 basis points and the policy rate by 10 basis points in the first quarter.
Official data shows that new bank loans shrank to 16.27 trillion yuan ($2.33 trillion) in 2025, highlighting sluggish borrowing demand. This puts pressure on the government to provide additional stimulus measures.
Fixed-asset investment in urban areas declined by 3.8% annually, marking the first annual decline in decades. The property investment slump and Beijing's campaign to manage local debt risks and excess capacity in certain industries have contributed to this decline.
Despite the challenges, China's manufacturing and exports have remained resilient. Businesses have successfully navigated growing trade barriers worldwide, with industrial production rising by 5.9% for the entire year of 2025 and exports climbing by 5.5%. This has resulted in a record trade surplus of over $1.2 trillion.
So, what does this all mean? China's central bank is taking a calculated approach, focusing on targeted support rather than broad policy easing. While this strategy may raise questions and spark debates, it showcases the bank's commitment to addressing specific economic challenges.
What are your thoughts on China's economic policies? Do you think this targeted approach will be effective in stimulating growth? Share your insights and join the discussion in the comments below!
