China cuts policy rate, bank reserve requirement ahead of US trade talks

China’s central bank has moved to loosen liquidity for the first time in 2025.

The People's Bank of China PBOC said May 7 it would cut its interest rate for 7-day reverse repurchase in the open market from 1.50% to 1.40%, effective May 8. It would also lower the reserve requirement ratio (RRR) by 0.5 percentage points on May 15.

The interest rate cut is to "implement a moderately loose monetary policy and strengthen support for the real economy," said PBOC in a statement, while the RRR cut would "improve the foresight, pertinence and effectiveness of macro-control."

Reverse repo is the PBOC process in which it purchases securities from commercial banks, with an agreement to sell them back in the future.

The central bank of the world's second-largest economy cut its 7-day reverse repo rate, often an indicator of upcoming adjustments on loan prime rates (LPR), six times between 2022 and 2024. It reduced the banks' reserve requirements five times over the same period.

Banks in China generally use the one-year LPR, currently at 3.1%, as the benchmark for loans to companies. Banks usually use the five-year LPR, currently at 3.6%, as the benchmark for mortgages. The one- and five-year LPRs are at record low levels.

The latest cuts came after news — confirmed by both sides — of trade talks between US officials, including Treasury Secretary Scott Bessent and chief trade negotiator Jamieson Greer, and Chinese Premier He Lifeng, the country's top economic official, in Switzerland this coming weekend.