China injects ‘tactical’ monetary stimulus ahead of key US trade meeting

BEIJING – The Chinese authorities announced on May 7 a raft of stimulus measures, including interest rate cuts and a major liquidity injection, as Beijing steps up efforts to soften the economic damage caused by the trade war with the US.

The announcements came shortly after US and Chinese officials said US Treasury Secretary Scott Bessent and chief trade negotiator Jamieson Greer will meet China’s top economic official He Lifeng in Switzerland this weekend for talks.

The talks are the first opportunity for the two sides to de-escalate tensions after a protracted cat-and-mouse game over tariffs, in which neither wanted to be seen as backing down.

The tensions have roiled global markets and upended supply chains. The Chinese economy is already feeling the pain from the triple-digit tariffs, with data last week showing factory activity contracting in April at the fastest pace in 16 months.

Concerns have been rising over the impact the tariffs would have on the job market and on the already strong deflationary pressures in China as exporters lose their biggest customer.

“The domestic economy must be strong enough before (China) kicks off any protracted trade negotiations,” Mr Xing Zhaopeng, senior China strategist at ANZ, said of the latest stimulus measures.

Chinese stocks jumped as investors cheered the easing steps and the ice-breaker trade talks.

Citi analysts said in a note that “the tariff impact had started to surface”, and the stimulus measures could be “tactical” ahead of the trade talks. “Timely domestic support could create more leverage for China,” they said.

China’s central bank will lower the borrowing cost of its seven-day reverse repurchase agreements, its benchmark interest rate, by 10 basis points to 1.4 per cent, effective from May 8. Other interest rates will drop in line with the key rate.

The amount of cash that banks must hold as reserves, known as the reserve requirement ratio (RRR), will be cut by 50 basis points from May 15, bringing the average level to 6.2 per cent.

People’s Bank of China (PBOC) governor Pan Gongsheng told a press conference that the first RRR cut since September 2024 will release one trillion yuan (S$179 billion) in liquidity.

At the same event, Mr Wu Qing, chairman of the China Securities Regulatory Commission, said the authorities will help A-share listed companies affected by tariffs to cope with difficulties.

Mr Li Yunze, head of the National Financial Regulatory Administration, said Beijing will expand a pilot scheme allowing insurance companies to invest in stock markets by an additional 60 billion yuan.

Additionally, Mr Pan said the central bank will set up low-cost relending facilities for purchases of tech-related bonds and for investments in eldercare and services consumption. Similar existing tools to support agriculture and small businesses will be enhanced, he said.

The PBOC is also trimming mortgage costs for some buyers.

Policymakers have been flagging monetary policy easing moves since late 2024 but had held fire while the renminbi was under pressure, fearing capital outflows, analysts said.

A slightly stronger renminbi in recent days may have given the central bank an opening.

“I don’t have very high expectations of the credit impact of these measures,” said Mr Xu Tianchen, senior economist at the Economist Intelligence Unit, but he added that they “inject renewed confidence, which will support the stock market”.

Washington and Beijing are expected over the weekend to discuss reductions of the broader tariffs, two sources familiar with the planning told Reuters.

The negotiating teams are also expected to discuss eliminating duties on specific products, US policies on de minimis and the US export control list, sources said.

Beijing has largely kept up its fiery rhetoric as tensions soared over the past few weeks, having vowed to “never kneel” to US President Donald Trump’s tariffs.

The stimulus measures announced on May 7 are “preventive in nature, as the US-China trade negotiations may take quite a long time”, said Mr Ma Hong, senior analyst at GDDCE Research Institution. REUTERS