China keeps benchmark lending rate unchanged despite slowing economic growth

The People’s Bank of China on Tuesday kept its lending prime rate unchanged as authorities focus on targeted support to specific sectors to support the slowing economy rather than broad policy easing.

The People’s Bank of China kept its one-year and five-year loan prime rates unchanged at 3% and 3.5%, respectively, for the eighth consecutive month.

The one-year rate affects most new and outstanding loans, while the five-year benchmark affects mortgages.

The decision comes as the world’s second-largest economy lost momentum in the final quarter of 2025, growing 4.5% year-on-year, the slowest pace since resuming from strict coronavirus measures in late 2022.

Nominal GDP, a barometer of corporate profitability and household salaries, has been below 4% for the third year in a row, hitting 3.8% in the fourth quarter, according to economists at Barclays. This is the lowest level in 50 years, excluding 2020, when the pandemic disrupted the economy.

The bank said the GDP deflator – a measure of changes in the prices of goods and services – remained negative in the 11th quarter and it expected deflation to continue throughout the year.

Retail sales growth in December was a three-year low of 0.9%, as household confidence continued to be hit by a years-long housing recession, a tough job market and persistent deflation.

China’s national planner said in a press conference on Tuesday that policymakers will continue to implement “more active fiscal policy” and “moderately accommodative monetary policy” aimed at supporting price recovery.

“Beijing is growing concerned about one of the worst domestic demand slowdowns in a century,” Nomura’s economist team said in a note on Monday.

The central bank last week cut interest rates on structural monetary policy tools by 0.25 percentage points and reduced the one-year re-lending rate on agricultural and small business credit facilities to 1.25% from Monday.

Rather than directly lowering policy interest rates, it lowered the interest rate charged by the central bank on funding to financial institutions, reducing borrowing costs for banks and encouraging banks to lend to targeted sectors at more favorable interest rates.

The People’s Bank of China will also establish a dedicated refinancing program for private enterprises, increase the number of innovation loans, and support small and medium-sized private enterprises. Additionally, the minimum down payment ratio for commercial real estate loans will be lowered to 30% in an effort to reduce inventory in the real estate market.

Banks’ new lending volume in 2025 shrank to 16.27 trillion yuan ($2.33 trillion), the lowest level in seven years, according to official data compiled by financial services firm Wind Information, highlighting weak borrowing demand and growing pressure on the government for more stimulus.

Deputy Governor Zou Lan told reporters last week that while he acknowledged that the situation for further monetary easing was improving, there was still “more room” to lower both the deposit reserve ratio and the policy rate this year.

Mr Zou said banks’ net interest margins (NIM) were showing signs of stabilizing after years of contraction that weighed on lenders’ profitability. NIM remained at 1.42% for two consecutive quarters through September, but fell 11 basis points compared to the same period last year.

Zou noted that the recent appreciation of the renminbi also helps create room for policy rate cuts. China’s offshore yuan rose more than 1% against the dollar last month, breaking above the key benchmark of 7 yuan to the dollar for the first time since May 2023.

The offshore yuan was little changed on Monday at 6.9571 yuan against the dollar, while the onshore yuan traded at 6.9612 yuan to the dollar, according to LSEG. China’s 10-year government bond yield fell slightly to 1.834%.

Policymakers attribute the recent appreciation of the yuan to a weaker dollar and easing geopolitical tensions between the United States and China, rather than a shift in monetary policy. Zou said the People’s Bank remains committed to preventing “overshoot” and keeping the yuan in a “rational and balanced equilibrium.”

Economists at Goldman Sachs had expected the central bank to cut reserve requirements by 50 basis points and policy interest rates by 10 basis points in the first quarter.

As companies overcome growing trade barriers around the world, China’s manufacturing and exports are holding up well, with industrial production up 5.9% and exports up 5.5% for the full year of 2025, with a trade surplus of $1.2 trillion at the beginning.

Fixed asset investment in urban areas fell 3.8% last year, the first annual decline in decades, dragged down by a deepening slump in real estate investment and Chinese government policies aimed at curbing local debt risks and curbing overcapacity in some industries.