China’s central bank, the People’s Bank of China (PBOC), has left investors puzzled with its recent flip-flop on monetary policy, sowing confusion about the timing of potential interest rate cuts. Back in September, PBOC Governor Pan Gongsheng unveiled a broad stimulus package that generated optimism for a significant shift in policy. However, the central bank has since refrained from cutting interest rates for nearly six months, despite its most dovish stance in 14 years. While officials have hinted at lowering the reserve requirement ratio (RRR) for banks, they have yet to follow through. Additionally, a government bond-buying initiative was abruptly halted, tightening interbank liquidity.
This lack of decisive monetary action has raised concerns about the economy’s ability to recover, delaying expectations for monetary easing in 2025. Global banks, including Citigroup, Nomura, and Standard Chartered, now foresee potential rate cuts in the second quarter of the year, later than initially anticipated. Goldman Sachs has also warned that the reduction in the reserve requirement ratio may come later than expected.
Christopher Beddor, deputy director at Gavekal Dragonomics, pointed out, “The PBOC has signaled many policies, and while it usually follows through, it doesn’t always do so.” He added that the uncertainty surrounding policy actions might erode market confidence, particularly regarding currency policy.
The policy vacuum has come at a time when the Chinese government is preparing to introduce new plans during the upcoming annual legislative session in March. These plans include issuing more bonds to support the country’s ambitious economic growth targets. Such measures could further strain market liquidity, increasing the pressure on the PBOC to step in and provide more stimulus.
Despite this, openly criticizing the PBOC’s indecisiveness is a delicate matter for investors, as it could risk backlash from authorities. However, some analysts have voiced concerns over the uncertainty, with Standard Chartered highlighting the “confusion about the policy direction.”
The reasons behind the PBOC’s apparent policy shift remain unclear, but several theories have emerged. Economists at TS Lombard argue that the central bank may be prioritizing the stability of the yuan over rate cuts, linking its policy decisions to trade tensions and US tariffs. By maintaining the value of the yuan, the PBOC may be trying to protect China’s economy from the effects of trade wars, especially as the country grapples with the economic consequences of the Trump administration’s tariffs.
Another theory suggests that the PBOC is tightening liquidity as a warning to bond investors, signaling that they could face losses if they continue to bet on haven assets. Yet, with the Chinese economy facing deflation, it remains uncertain how long the central bank can resist cutting rates.
Furthermore, the Federal Reserve’s ongoing battle with inflation might also be influencing the PBOC’s decisions. Ecaterina Bigos, Chief Investment Officer for AXA Investment Managers in Asia, stated that Pan may be waiting for the Federal Reserve to take action before China implements its own monetary policy changes.
China’s difficult economic conditions—marked by a severe property slump and weak domestic consumption—have only added to the PBOC’s balancing act. With the country heading for its longest period of deflation since the 1960s, these challenges have overshadowed any recent market optimism sparked by AI-related investments such as the DeepSeek model.
Despite the mounting pressure, the PBOC has refrained from making any immediate comments. The central bank did acknowledge earlier this month that “foreign economic factors” are influencing its policy pace.
Global Influence and Yuan Stability
In recent years, President Xi Jinping has placed significant emphasis on building a “powerful currency,” prioritizing the yuan’s stability as a means to increase its global usage. Pan Gongsheng further reinforced this in February, stating that a stable yuan plays a crucial role in maintaining global financial stability.
The yuan’s stability has become even more critical as China faces ongoing trade tensions with the US. In particular, the PBOC has taken measures to prevent the currency from depreciating sharply in the face of Donald Trump’s tariffs, which were designed to put pressure on China’s economy. Instead of letting the yuan weaken to aid exporters, the PBOC has kept its daily reference rate above the key 7.2 per dollar threshold and has used verbal warnings and capital control adjustments to curb any sharp movements.
Selling pressure on the yuan has been compounded by fears of rising inflation in the US, exacerbated by Trump-era tariffs. Consequently, the PBOC may find itself waiting for a more favorable period to ease policy without triggering excessive depreciation of the yuan.
The yuan’s current weaker level presents a challenge for the PBOC. During the Trump administration’s tariff escalation in 2018, the currency depreciated by nearly 10% to about 7 per dollar. Now, the PBOC is working to stabilize the yuan around 7.3 per dollar, which may limit the central bank’s room for policy maneuvering.
Ding Shuang, chief economist at Standard Chartered, explained that the PBOC has a long-term target for the yuan’s exchange rate, noting that it has fluctuated between 6.2 and 7.3 per dollar since 2015.
Monetary Tools and Economic Outlook
While the PBOC may be reaching the limits of traditional monetary easing, alternative tools could help inject liquidity into the economy. The central bank has recently introduced reverse repurchase agreements and is exploring other measures to ensure adequate market liquidity, especially as China continues to battle weak demand.
However, the PBOC’s monetary policy options are becoming increasingly constrained, with the benchmark interest rate at a record low of 1.5% and the reserve requirement ratio for banks at 6.6%, nearing the 5% minimum threshold previously suggested by officials.
According to Lu Ting, Chief China Economist at Nomura, the PBOC alone may not be able to resolve China’s economic challenges. Instead, he suggests that fiscal policy should play a more prominent role in boosting domestic demand and stabilizing growth, particularly in light of external pressures.
Related topics:
Gold Price Near Record High as Tariff Threats Fuel Safe-Haven Demand
USD/INR Stabilizes as Market Awaits Key Data and Possible RBI Intervention
Alibaba Drives Asian Stocks Higher Amid Strong Earnings; Geopolitical Concerns Persist
