- 27/5/2025

China forced to react

3 min

The world’s second-largest economy has been struggling for some time, weighed down by weak domestic demand and a property sector suffering from significant overcapacity. Who hasn’t seen the TV reports about China’s “ghost cities”, where developers have built housing for three billion people, even though the Chinese population has been shrinking for years? And let’s not forget the shock waves caused by the collapse of Evergrande in 2021. That was when the world discovered that the most indebted company on the planet could no longer pay the interest on its colossal $300 billion debt. The episode sent jitters through financial markets, which suddenly realised just how sick the sector had become.

Since then, having recognised the problem, China has adopted a new strategy: shifting its economic growth model away from domestic demand and towards exports. This was a sharp turnaround from President Xi Jinping’s original programme when he came to power in 2013. While the country hasn’t completely abandoned its efforts to boost citizens’ purchasing power – nor its attempts to contain the damage to a banking sector heavily exposed to real estate (which accounts for 25% of national GDP) – the focus has decisively shifted back to conquering export markets. A sound idea at the time, but one that is now faltering under the weight of the US trade war.

The first figures showing the impact of Donald Trump’s trade policy are now appearing, and they’re worrying: mass order cancellations, half-empty cargo ships docking in Los Angeles, raising fears of shortages in U.S. stores, a drop in industrial output, and the first layoff announcements in numerous factories.

China turns to monetary policy

In response, China has once again turned to its monetary toolkit. The central bank has announced a cut to its benchmark interest rate and a reduction in the reserve requirement ratio for banks to support the economy in the face of the trade war with the U.S. Several key interest rates will also be cut to inject more long-term liquidity into the banking system. The reserve ratio will also be reduced for vehicle finance firms, freeing up capital and improving lending capacity. Meanwhile, the cost of borrowing under a government-backed home purchase scheme will be lowered once again, in a fresh attempt to stabilise the property market. Finally, China is expected to announce details of a plan to expand stock market investment opportunities for insurance companies.

Emergency measures

A first meeting between Donald Trump and the Chinese president is expected soon, in the hope of finding common ground on tariffs. But in the meantime, the newly announced monetary measures signal just how urgent the situation has become. It’s still too early to fully assess the damage caused by the trade war, as statistics are often not yet available. Time now seems to move at a different pace since Donald Trump’s return to power. The first 100 days feel more like 100 weeks!

In the meantime, these monetary policy announcements will push the yuan down even further – a small extra boost for exports, but one that seems negligible in the face of the Trump tidal wave.