As the pressure on the economy increases, China’s central bank plans to change its policy

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The People’s Bank of China plans to cut interest rates this year in a historic shift toward orthodox monetary policy to align with the U.S. Federal Reserve and the European Central Bank.

In comments to the Financial Times, China’s central bank said it could cut interest rates from the current 1.5 percent in 2025 “at an appropriate time.”

It prioritizes “the role of interest rate adjustment” and moves away from the “quantity objectives” of credit growth that will lead to changes in China’s monetary policy.

Most central banks, such as the Fed, have only one policy variable, the benchmark interest rate, which they use to influence credit demand and activity in the economy.

of P.B.C On the other hand, apart from setting different interest rates, it provides informal guidance to banks on how much they should expand their loan books.

Although such guidance is the most important tool for managing Economy For decades – when credit was directed to high-growth sectors such as manufacturing, technology and property – officials at the PBoC now believe reform is urgent.

“Ratings improvement is likely to be a real focus of POBSC in 2025,” said Richard Xu, a China financial analyst with Morgan Stanley in Hong Kong. “China’s economic growth must urgently change from a mindset that only focuses on expanding the market size (of banks’ loan books).”

Loan request It has fallen Due to the prolonged slowdown in the property market. The PBoC also said that credit growth targets without taking risk into account can lead to discriminatory lending, which is wasteful in the long run.

The central bank said, “In line with the high-quality growth criteria, these quantitative targets have been closed in recent years.” “The PBoC will pay more attention to the role of interest rate control, and improve the formation and transmission of market-oriented interest rates.”

As a regime change, the PBoC clarified last year that its main policy tool is the seven-day reversion rate, rather than the host of interest rates it has relied on to date.

A reduced focus on credit growth targets could fuel widespread overcapacity in China, leading to bad debt at home and disruptions to global industries such as steel.

But the central bank is struggling to implement its move to interest rates because the government wants to channel money into high-tech and manufacturing sectors, which are easier under the old system of credit expansion.

While trying to make structural changes to policy, the PBoC is also under pressure to stabilize China’s economy.

In the year In 2024, the central bank cut the seven-day rate twice and the five-year rate three times on mortgage rates as part of its most aggressive stimulus package since the Covid-19 pandemic.

The moves come in line with President Xi Jinping’s promise of 5 percent economic growth despite problems in China’s property sector and trade tensions with the US.

PBoC governor Pan Gongsheng and his predecessors Yi Gang and Zhou Xiaochuan pushed for risk-based lending rates at a recent meeting with officials from China’s biggest banks.

Bankers at the meetings warned that there could be confusion in pricing long-term loans as the market gets used to the PBOC’s guidance, underscoring the challenge of transitioning to the new system.

For international investors, if the PBOC is successful, China’s monetary policy will begin to resemble the system they are used to in the US, Europe or Japan.

Central bank for the first time in two decades He bought government bonds The way the Fed executes its policy is to inject money into the financial system by 2024 through an open market.

Analysts say the PBoC still lacks some of the essential ingredients for a system based on interest rates, with a regular schedule and publicly announced meetings to make policy decisions.

Without such guidance, “market participants can only guess what will happen next,” said Haibin Zhou, China economist at JPMorgan Chase.