China's central bank has pledged to further push funding costs lower for the real economy, after lending rates dropped in the first quarter due to policies aimed at freeing up more cash for small and private companies.

While the majority of new loans remain priced above benchmark interest rates, 16.35% were priced below benchmark in March, compared to 9.61% recorded a year ago, according to a quarterly monetary policy report released by the People's Bank of China on May 17. The weighted average lending rate for corporates and home buyers also fell to 5.69% in the first quarter compared to 5.91% a year ago.

Funding costs are expected to drop further this year, the central bank said, as it continues to promote interest rate liberalization in a bid to sync benchmark rates that it sets with those in the market. This is also aimed at meeting concerns that lending below current benchmark indicators could hurt Chinese banks, particularly as they are being asked to lend to small businesses at lower rates. In late April, an official from the China Banking and Insurance Regulatory Commission warned that loans extended to small or micro-sized enterprises below benchmark rates could affect lenders' sustainability and profitability.

The central bank also said that it would continue targeted stimulus policy as renewed trade tensions between China and the U.S. could drive up inflation and financial market turbulence. The country's economy slowed more than expected in April as both industrial production and retail sales growth posted sharp declines.

China has been easing its monetary and fiscal stance alongside a softening domestic economy. It recently announced a cut to reserve requirement ratios for small and medium-sized rural commercial banks to 8% from 11.5%, following five cuts since the beginning of 2018.

In the first quarter, due partly to strong loan demand from Chinese exporters amid higher U.S. tariffs, the amount of China's outstanding loans rose 13.70% year over year to 142.106 trillion yuan, marking the highest such growth since the second quarter of 2016.

Small and medium-sized banks remained key drivers, as they extended 3.237 trillion yuan worth of new loans in the first quarter, compared to 2.539 trillion yuan for large banks. Small rural banks issued 858.3 billion yuan worth of new loans, more than the previous two quarters combined.

As of May 21, US$1 was equivalent to 6.90 Chinese yuan.