China Stocks Edge Up as Key Lending Rates Remain Steady Amid Trade Tensions

The People’s Bank of China (PBOC) left its Loan Prime Rates (LPRs) unchanged in April 2025, maintaining the 1-year rate at 3.1% and the 5-year rate at 3.6%—both at historic lows. This decision, widely anticipated by economists, has given a slight boost to Chinese equities, with the Shanghai Composite Index rising 1.2% in the days following the announcement. The stability in rates reflects the PBOC’s balancing act between supporting economic growth and managing risks from U.S.-China trade tensions and currency pressures.

The LPR Decision: A Cautious Stance

The PBOC’s decision underscores its reluctance to cut rates further despite weak inflation and trade-related headwinds. Consumer prices fell 0.1% year-on-year in March, while producer prices dropped 2.5%, marking the 29th consecutive month of deflation. These figures suggest underlying economic sluggishness, but the central bank remains constrained by two key factors:

1. Yuan Stability: With the U.S. imposing tariffs of up to 245% on Chinese goods and China retaliating with 125% duties on U.S. imports, the PBOC must avoid actions that could weaken the yuan. Lower rates might exacerbate currency depreciation, complicating trade negotiations.
2. Bank Profit Margins: Commercial banks already face narrow interest margins due to record-low LPRs. Further cuts could squeeze profitability, risking financial sector stability.

Analysts note that the PBOC is waiting for clearer signals from the U.S. Federal Reserve before easing further. A reduction in the 7-day reverse repo rate (currently at 1.5%), a precursor to LPR adjustments, remains unlikely without a Fed policy shift.

Economic Growth and Fiscal Stimulus

China’s 5.4% GDP growth in Q1 2025, the fastest pace in 1.5 years, has provided some comfort to markets. The rebound was driven by rebounds in retail sales (+4.8% year-on-year) and industrial output (+5.9%), though exports slowed 2.3% in March amid U.S. tariff impacts.

To offset trade-related risks, Beijing has prioritized fiscal measures over monetary easing. Initiatives such as enhanced social welfare programs and subsidies for household consumption are expected to support domestic demand. However, global banks have revised China’s 2025 growth projections downward, anticipating a 0.5–1% drag from trade tensions.

Implications for Investors

The LPR hold offers mixed signals for investors:
- Bullish Take: Stability in rates avoids the immediate risk of tighter financial conditions, supporting sectors like real estate and consumer goods.
- Bearish Take: The absence of further cuts highlights the PBOC’s limited tools to counter deflation and trade pressures, suggesting China’s recovery remains fragile.

The real estate sector, heavily reliant on LPR-linked mortgages, has seen modest gains, with property developers like China Vanke (000002.SZ) up 3% post-announcement. Meanwhile, export-oriented firms—such as tech manufacturers facing U.S. tariffs—remain under pressure.

Looking Ahead: Key Catalysts

• Trade Negotiations: A resolution to U.S.-China tariffs could unlock upside for equities, particularly in export-heavy sectors.
• Inflation Trends: A return to positive CPI growth (from -0.1% in March) might signal improving demand, easing pressure on the PBOC to cut rates.
• Fed Policy: A U.S. rate cut could free the PBOC to ease further, potentially lifting LPR-sensitive stocks.

Conclusion: A Delicate Balancing Act

While Chinese stocks edged higher on the LPR decision, investors should remain cautious. The PBOC’s reliance on fiscal stimulus and its wait-and-see approach to monetary easing reflect a recognition of structural challenges. With trade tensions likely to persist and inflation stubbornly low, the path to sustained growth remains uncertain.

The 5.4% Q1 GDP growth and 5.9% industrial output provide near-term optimism, but deflation and trade risks loom large. Investors may want to focus on domestically oriented sectors (e.g., consumer staples, healthcare) while hedging against trade-exposed industries. Until tariffs ease or inflation rebounds, China’s equity rally is likely to remain modest—a reflection of its careful dance between stability and growth.