Amid the ongoing trade war with the United States and facing serious challenges, Chinese foreign trade enterprises suddenly made headlines by announcing talks with the U.S. and implementing a monetary easing policy of reserve requirement cuts and interest rate reductions, sparking high market attention. Does this series of moves suggest that the Chinese economy has reached a critical point?
On May 6th, the State Council Information Office of China announced that a press conference would be held at 9 a.m. on May 7th. Leaders of the People’s Bank of China, the China Banking and Insurance Regulatory Commission, and the China Securities Regulatory Commission would introduce the “comprehensive financial policies supporting market stability and expectations” and answer questions from reporters.
At the press conference on May 7th, the Governor of the People’s Bank of China, Pan Gongsheng, announced a cut in reserve requirements and interest rates. The reserve requirement ratio for financial institutions would be reduced by 0.5 percentage points, the policy interest rate would be lowered from 1.5% to 1.4%, and the housing provident fund interest rate would be reduced by 0.25 percentage points.
Political commentator Li Linyi believes that this move was made against the backdrop of the latest Caixin PMI data falling well below expectations and official data showing increasing downward pressure on the economy. Even the official manipulated numbers cannot hide the true state of the Chinese economy.
The April Caixin China General Services Business Activity Index (services PMI) released on May 6th recorded 50.7, a decrease of 1.2 percentage points from March, reaching the lowest point in seven months within the expansion range. Meanwhile, the April Caixin China Manufacturing PMI decreased by 0.8 percentage points to 50.4, the lowest in two months. Both industries experienced double declines in business climate, with the comprehensive PMI output index for the month dropping by 0.7 percentage points to 51.1, indicating a slowing expansion pace of domestic business operations.
Recent data released by the National Bureau of Statistics of China showed that in April, the manufacturing and services PMIs decreased by 1.5 and 0.2 percentage points to 49.0 and 50.1 respectively, with the former entering the contraction range again after two months; the comprehensive output index for the month recorded 50.2, dropping by 1.2 percentage points.
Business confidence has been significantly impacted by tariff disturbances, evident in the notable decrease in business expectation indexes in April.
With the U.S. imposing tariffs on Chinese goods by as much as 145% and removing the tax-exempt threshold for small packages, the direct impact of a simple monetary easing policy on boosting foreign trade may be limited. While the released liquidity from reserve cuts may alleviate some of the funding pressures on enterprises, the interest rate reduction may help lower financing costs. Whether these measures can truly reverse the sudden halt in export orders and production suspensions remains to be seen.
For the domestic economy, uncertainties remain about whether the interest rate cut can effectively stimulate investment and consumption. China’s economy currently faces multiple challenges such as a real estate crisis and weak consumption. Additionally, with severe blows to business confidence due to tariff disturbances, relying solely on monetary policy may not fundamentally alter expectations.
Early on May 7th, the Chinese Ministry of Foreign Affairs announced that Vice Premier of China, He Lifeng, would visit Switzerland from May 9th to 12th. During this visit, He Lifeng, as the lead negotiator for China on Sino-U.S. economic and trade issues, will meet with U.S. Treasury Secretary, Bezent.
China’s decision to announce reserve requirement cuts and interest rate reductions ahead of crucial economic and trade talks with the U.S. has triggered various speculations. This move may indicate Beijing’s attempt to signal its willingness to resolve issues through negotiations with the U.S. in exchange for trade easing. However, it also reflects the severity of the domestic economic situation, forcing China to adopt interest rate cuts and reserve requirement reductions to stabilize the market and expectations.
Li Linyi pointed out that while China has consistently shown a tough stance against the U.S., the dispatch of Vice Premier He Lifeng to hold talks with U.S. Treasury Secretary and the concurrent measures such as reserve requirement cuts and interest rate reductions suggest that China’s economic plight is quite serious. He believes that such “firefighting” measures may only provide short-term relief, and over time, the dire state of the Chinese economy will only deepen.
Official data for April’s import and export figures are expected to be released this week, further revealing the specific impact of the Sino-U.S. trade war on the Chinese economy. Li Linyi estimates that the data may paint an even bleaker picture.
The outcomes of the meeting between Vice Premier He Lifeng and U.S. Treasury Secretary, as well as whether China will introduce more substantial stimulus policies, will be crucial indicators of the trajectory of the Chinese economy.
Earlier, the People’s Bank of China pledged to adjust monetary policies at the right time to support the economy amid escalating tensions in the Sino-U.S. trade situation. Last year, China cut benchmark interest rates and reserve requirements twice to boost the struggling economy.
Despite U.S. President Trump escalating tariffs on Chinese goods, putting pressure on China’s tight currency and weak consumption, the People’s Bank of China has refrained from cutting interest rates this year.
On March 15th, China’s official media reported that China should choose the right timing and intensity to relax monetary policies, leading outsiders to believe that China may not adopt further loosening policies in the short term.