China keeps key rate steady with traders expecting cuts in 2025

BEIJING - China has kept a key interest rate unchanged – a move widely expected by economists – as it seeks to keep its powder dry ahead of possible escalation in trade tensions with the United States.

The People’s Bank of China (PBOC) held the interest rate on the one-year medium-term lending facility (MLF) steady at 2 per cent, according to a statement on Dec 25. Nine out of the 10 economists surveyed by Bloomberg forecast no change. The rate was last cut in September by 30 basis points.

Earlier in December, policymakers pledged a “moderately loose” monetary policy – the first shift in stance in about 14 years – along with “more proactive” fiscal tools to bolster the economy.

But so far, they have refrained from announcing any concrete stimulus, reflecting their patience before the US imposes the tariffs that US President-elect Donald Trump threatened earlier. 

Still, the market has ramped up bets on sizeable interest-rate reductions in 2025, sending China’s sovereign bond yields to record lows.

On Dec 25, the PBOC offered 300 billion yuan (S$55.9 billion) of policy loans via MLF, versus with the maturities of 1.45 trillion yuan in December. It would be the fifth month in a row that the central bank withdrew cash with the tool on a net basis. 

The cash shortfall could potentially be offset by the PBOC’s liquidity provisions through other instruments. In November, the central bank injected a net 1 trillion yuan of funds through the so-called outright reverse repurchase agreements and purchased government bonds. 

The operations reflect China’s goal of gradually downplaying the role of MLF and prioritising shorter-term rates as policy anchors. 

China is also allowing local officials to invest in more areas with a key government bond while also simplifying its approval process in a bid to make better use of an important source of public funding to drive the economy.

Local governments can use their special bonds to invest in projects as long as they are not on a special list published by the Cabinet, the government said in a document on Dec 25.

That list includes projects that do not generate any returns, government buildings, vanity construction projects like giant sculptures and commercial property. 

Eleven regions, including some of the biggest provincial economies like Guangdong, will be allowed to approve the projects funded by the bonds. In the past, all localities needed to get approval from the nation’s top economic planning agency and Finance Ministry before selling the bonds.

China’s top leaders have made boosting domestic demand their top priority for economic work in 2025 because the robust growth of exports is threatened by a potential second trade war with the US.

Government investment remains a key lever to drive growth, even after Beijing pledged more focus on consumption because people’s willingness to spend remains sluggish.

Local government special bonds have grown to become a key source of funding for infrastructure projects over the past decade. But regions increasingly struggle to find suitable projects that meet Beijing’s criteria as investment returns decline across the economy. Sales of local government bonds were slow in 2024, meaning weakened support for growth.

The State Council guidelines also allowed the bonds to make up a greater proportion of a project’s overall investment when used as equity capital. More areas including information technology, eldercare and childcare are eligible for investment. BLOOMBERG