China Holds Lending Rates Amid Trade Tensions, Eyes Easing Later in 2025

The People’s Bank of China (PBOC) left its benchmark Loan Prime Rates (LPRs) unchanged in April 2025, maintaining the one-year rate at 3.1% and the five-year rate at 3.6%. This decision, announced on April 20, underscored the central bank’s cautious approach to balancing economic growth and geopolitical risks, particularly the escalating U.S.-China trade tensions. Despite low inflation and a stable first-quarter GDP growth of 5.4%, the PBOC opted to hold rates steady, signaling a wait-and-see stance before implementing further stimulus.

The Calculus Behind the Hold

The PBOC’s decision was rooted in two primary factors: trade uncertainty and domestic stability. While China’s economy showed resilience in the first quarter, with GDP growth exceeding expectations, the looming threat of U.S. tariffs—which analysts predict will increasingly strain exports—has kept policymakers hesitant. The central bank’s mandate to stabilize both the economy and the yuan’s value complicates aggressive easing.

Low inflation (3.0% year-on-year in March) typically creates room for rate cuts, but the PBOC has historically tied LPR adjustments to changes in its policy rates (like the Medium-term Lending Facility, or MLF). Since the MLF rate has remained unchanged since October 2024, the LPR hold was widely anticipated.

Market Reactions and Global Spillover

The decision had immediate ripple effects across markets. Chinese banking shares surged, with Bank of China climbing 1.94% and Industrial and Commercial Bank of China gaining 1.12%, as investors welcomed the stability. The broader CSI 300 index edged up 0.33%, but regional markets were mixed: Japan’s Nikkei 225 fell 0.99%, while South Korea’s Kospi rose 0.17%.

The yen strengthened to a seven-month high against the dollar (141.16) as traders sought safe havens amid trade fears, while spot gold hit a record $3,368.92/oz—a stark reflection of global risk aversion.

The LPR’s Role and Future Outlook

The LPR, which directly influences mortgages and corporate loans, remains a critical tool for managing household and business borrowing costs. The five-year rate—unchanged since October 2024—continues to support long-term lending, though its effectiveness is muted without complementary fiscal policies.

Analysts forecast further easing later in 2025 as U.S. tariffs intensify. A Citigroup report estimates that tariffs could reduce China’s GDP growth by 0.5-1.0% in 2025, pressuring the PBOC to cut rates or lower reserve requirements. Additionally, stabilizing the yuan, which has depreciated 3.2% against the dollar year-to-date, may require monetary adjustments to curb capital outflows.

Conclusion: A Delicate Balance

The PBOC’s April decision reflects its dual challenge of sustaining growth while navigating trade headwinds. With GDP growth holding firm at 5.4% and inflation subdued, the central bank has room to act—but geopolitical risks demand caution. Investors should anticipate incremental easing in the latter half of 2025, particularly if trade tensions escalate or the yuan weakens further.

For now, the status quo benefits financial stocks (e.g., Bank of China) and safe assets like gold, while exporters face downside risks from tariffs. The PBOC’s next move hinges on whether trade tensions—or domestic growth—tip the scales first.

In summary, China’s pause on rates in April underscores a strategic patience. The path forward remains tied to external pressures, but the groundwork for easing is already laid—waiting only for the right moment to act.