MNI PBOC WATCH: Softer Economy To Push H2 Policy Easing

China’s Loan Prime Rate held steady in May, though weaker-than-expected April credit and economic data suggested elevated oil prices are beginning to drag on the economy, increasing pressure on the People’s Bank of China to ease policy further in H2.

The LPR was left unchanged on Wednesday at 3.0% for the one-year tenor and 3.5% for the five-year and longer maturity, marking a 12th consecutive month on hold. Both rates were lowered by 10bp in May 2025 after the PBOC cut its seven-day reverse repo rate – the benchmark policy rate – by 10bp to 1.4% on May 8, followed by a 50bp reduction in the reserve requirement ratio on May 15. (See MNI PBOC WATCH: May LPR To Hold As Bank Interest Margins Fall)

The possibility of further reserve requirement ratio and interest-rate cuts later this year remains should weak credit and economic performance seen in April extend into Q2, said Dong Ximiao, chief researcher at Merchants Union Consumer Finance. Holding the LPR steady was intended to consolidate the effects of earlier easing measures, stabilise the banking system and preserve room for coordination with fiscal policy, he added.

According to the central bank, outstanding yuan loans fell by CNY399.96 billion in April, while medium- to long-term corporate loans – a key indicator of real borrowing demand – unexpectedly declined by CNY660 billion y/y. Households also continued deleveraging, with outstanding short- and medium- to long-term household loans falling by CNY446.2 billion and CNY340.8 billion respectively.

OIL SHOCK

The external shock from the Middle East conflict has been widely viewed as the main cause of the poor corporate loan performance. Surging energy prices and disruptions to global raw-material supply chains have constrained production, while corporate sentiment has turned more cautious, leading firms to scale back output and spending.

The impact was also reflected in April economic indicators. According to the National Bureau of Statistics, aside from exports, production, investment and consumption all weakened relative to both prior readings and market expectations. Fixed-asset investment fell 8.0% y/y in April, compared with 1.6% previously, while real-estate sales declined 9.5%, worsening from the prior -7.5% reading.

Wang Qing, chief macro analyst at Orient Golden Credit Rating International, said as the drag from the Middle East conflict on the global economy becomes more apparent, China’s exports are likely to slow in H2. Against a backdrop of continued weakness in the property sector, consumption and investment demand will also require stronger policy support. Under such conditions, policy interest rates could be cut by 10bp-20bp, leading to a corresponding reduction in the LPR, he said.

Allen Ding, chief economist at China CITIC Bank International, estimated China’s economic growth at 4.9% in 2026, though this assumes the Strait of Hormuz becomes fully navigable by June. A continuation of disruptions into H2 2026 would present a significantly different scenario that markets have not yet priced in, Ding said. (See MNI INTERVIEW: China 2026 Export Growth To Support Yuan)

Global inflation risks would intensify, similar to 2021-2022, while world economic growth could fall below 3%, requiring a reassessment of China’s export and GDP outlook, he concluded.