- Headline activity held up in April, but loan data signals rising stress.
- Export growth stayed steady, though trade uncertainties cloud the outlook.
- Weak private investment and fragile consumption persist amid high real rates and property stress.
- Implication to forecast: We expect additional 20bps LPR and 50bps RRR cuts to support growth in 2H.
Related Insights
The People’s Bank of China (PBOC) announced a 10bp reduction to the banks’ 1-year Loan Prime Rate (LPR) to 3.00% on May 20th, aiming to reduce borrowing costs and revive credit growth. The move follows earlier reserve requirement ratio (RRR) cuts and forms part of broader efforts to support the economy amid persistent headwinds.
Headline activity held up in April, but credit data point to mounting stress. New loan issuance fell to multi-year lows, while trade uncertainties linger. The recently lowered US tariffs—cut from 145% to 30%—are still expected to shave 0.6ppts off GDP, reinforcing the case for continued policy easing.
External trade and tariffs
Export growth edged up to 6.4% YoY in Jan–Apr from 5.8% in Q1, driven by frontloading and resilient shipments of electronics, appliances, and machinery. In contrast, imports contracted further to -5.2% YoY YTD, reflecting softer demand for intermediate goods as manufacturers brace for weaker orders. While the 90-day truce offers temporary relief, the broader trade outlook remains uncertain and fraught with risks.
Investment and consumption
The outlook for investment and consumption remains uncertain. Overall fixed asset investment (FAI) growth remained soft at 4.0% YoY, but private sector FAI grew just 0.2% YoY in the first four months. State-sector investment increased 6.2% YoY, suggesting that policy-driven infrastructure spending is doing the heavy lifting.
On the consumer front, retail sales grew 4.7% YoY YTD, a slight pickup from Q1, supported by subsidies for durables like home appliances and electronics. Still, household sentiment is under pressure from weak job prospects and declining income growth. High youth unemployment and ongoing property market stress are likely to weigh on spending. Our estimates suggest that a 10% fall in home prices could shave 1.5ppts off retail sales growth.
Money supply
This is evidenced by the latest monetary data, which points to weak money demand despite ample liquidity. M2 growth picked up to 8.0% YoY in April, from 7.0% in March, following the PBOC’s accommodative stance. However, M1 growth remained muted at 1.5%, compared to 1.6% in March. The persistent gap between M1 and M2 underscores a lack of business confidence and continued household preference for time deposits over consumption.
Credit growth
Private sector borrowing remains sluggish, as shown by the divergence between robust government bond issuance and soft private credit growth. New loan slowed sharply to RMB 730bn in April, marking the weakest April print in over 15 years. Double-digit contraction of mid-long-term corporate pointed to subdued business appetite. Household loan, a proxy of mortgages, also fell.
Inflation and real rates
The deterioration in credit demand can partly attributed to elevated real interest rates. Headline CPI registered -0.1% YoY in April, while core CPI was flat at 0.5% YoY. Producer prices extended their deflationary streak for the 30th consecutive month, with PPI falling -2.7% YoY. Tariff driven overcapacity and front-loading will weigh on producer prices.
Monetary policy
The PBOC ramped up easing efforts in response to deteriorating credit conditions. In May, it cut the RRR by 50 bps to inject RMB1trn into the system, the benchmark 7-day reverse repo rate and 1Y LPR rate were also cut by 10 bps. Window guidance was issued to banks to reduce deposit rates and encourage lending to the real economy. We expect an additional 20bps cut in the 1Y LPR and a 50bps reduction in the RRR in 2H.
These moves are consistent with recent statements by PBOC Governor Pan Gongsheng, which emphasized the need for targeted support to the real economy and improved credit transmission. The central bank’s stance remains accommodative, with the focus on stabilising private investment and household consumption.
Outlook
We maintain our full-year GDP growth forecast at 5.0%, but risks are tilted to the downside. If credit conditions do not improve or if external demand softens, growth could fall short by 0.5-1ppt. Continued monetary easing is expected, but its impact will depend on policy transmission and additional fiscal push in 2H25.
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Nathan Chow 周洪禮
Senior Economist and Strategist - China & Hong Kong 高級經濟學家及策略師 - 中國及香港
[email protected]
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