China’s Central Bank Cuts Interest Rates Amid US Tariffs

The rate cuts and liquidity injections come amid a tariff war between China and the United States. Global trade and financial markets have been reeling as the world’s two largest economies remained mired in a trade standoff.

Since President Trump took office in January, the US has announced sweeping tariffs on Chinese products, as high as 145%. In retaliation, China imposed a 125% tariff on US goods and temporarily halted buying American agricultural products.

Key China’s Central Bank Measures

Interest Rate Reduction: China’s Central Bank lowered its seven-day reverse repo from 1.5% to 1.4%. Additionally, the central bank reduced its lending rate to commercial banks by 0.25% to 1.5%. The aim is to inject liquidity into China’s banking system to reduce borrowing costs for consumers and businesses.

Reserve Requirement Ratio (RRR) Cut: Effective May 15, China’s central bank will cut its RRR by 0.5%. This will lower the weighted average RRR from 6.6% to 6.2%. The measure will enable the release of about 1 trillion yuan ($138 billion) into China’s banking system. The aim is to facilitate more lending by Chinese commercial banks to private firms and consumers.

Support for Specific Sectors: The central bank introduced a 500 billion yuan re-lending facility to promote elderly care and domestic and service consumption (education, hospitality, tourism). This action aims to encourage Chinese banks to lend to these segments.

Why Did China Cut Interest Rates

China’s central bank cut interest rates to bolster the Chinese economy in response to trade tensions with the United States.

Since President Trump took office in January, the US has imposed tariffs as high as 145% on Chinese imports. China, in response, countered with tariffs of 125% on US goods. Already, the US tariffs are significantly harming China’s export competitiveness. In Late April, China reported a sharp monthly slowdown in manufacturing activity due to a plunge in new orders from the US amid tariffs.

China’s GDP growth target for 2025 is 5%. However, apart from US tariffs, China’s economy is underperforming due to sluggish consumer spending at home. Therefore, by cutting key interest rates, China is lowering financing costs to boost business investment and consumer borrowing.

According to data published by China’s National Bureau of Statistics, China’s inflation rate is in negative territory, -0.7% in February and -0.1% in March. Therefore, with inflation hovering below the target level of 2%, China’s central bank can implement monetary easing without any concerns of triggering inflation or overheating the economy.

Impact of US Tariffs on China’s Economy

President Trump’s 145% tariffs on Chinese goods have led to a sharp decline in US imports. China’s shipments to the United States plunged by over 21% year on year in April, while imports sank by nearly 14%. In the first four months of 2025, China’s exports to the US dropped 2.5% while imports fell 4.7% from 2024. Therefore, once a significant economic growth driver, China’s export model is now a drag on its GDP.

Output in key industries like electronics and machinery has slowed sharply. This is evident as China’s PMI (Purchasing Managers’ Index) fell from 51.2 in March to 50.4 in April, indicating contraction. Consequently, Chinese workers are protesting for back wages across China amid several factory closures triggered by steep US tariffs on Chinese imports.

The Yuan has depreciated to 7 against the US dollar, reflecting China’s shrinking trade surplus and weakening investor confidence.