China Holds Interest Rates Steady Despite US Federal Reserve Cut

• Despite the US Federal Reserve cutting rates, China kept its main interest rate at 1.40%.
• The central bank remains cautious about stimulus because exports are performing well and stock markets have surged to decade-high levels.

The People’s Bank of China maintained its benchmark interest rate at 1.40% on Thursday, defying expectations for monetary easing just hours after the Federal Reserve reduced US rates. The decision signals Beijing’s cautious approach to economic stimulus amid mixed signals from the domestic economy.

China’s central bank injected 487 billion yuan ($68.56 billion) into the financial system through open market operations. The seven-day reverse repo rate serves as the country’s primary tool for managing short-term liquidity conditions.

The rate decision comes as China’s economy shows signs of deceleration. However, officials appear confident that current growth momentum remains sufficient to meet annual targets without aggressive intervention.

Export Strength Supports Economic Outlook

Economic data suggests China’s export sector continues to perform better than anticipated. Goldman Sachs Chief China Economist Hui Shan noted that the economic slowdown has been less severe than predicted.

“The magnitude of the deceleration appears not as big as we assumed,” Shan stated. August business activity data reinforced this view, with export performance remaining robust despite global headwinds.

The resilience in overseas demand has provided policymakers with breathing room. Some stimulus measures originally planned for 2025 may now be delayed until 2026, according to analyst assessments.

Chinese officials maintain confidence in achieving the “around 5%” annual growth target. This projection underpins their measured approach to monetary policy adjustments.

Stock Market Rally Influences Policy Decisions

The Shanghai Composite Index has surged to decade-high levels, creating new considerations for monetary policymakers. The sustained rally has raised concerns about potential asset bubble formation.

Nomura Chief China Economist Ting Lu warned against large-scale stimulus that could fuel excessive market speculation. The central bank appears mindful of these risks when calibrating policy responses.

“Large-scale stimulus could push stocks into dangerous territory,” Lu cautioned. However, he suggested a modest 10-basis-point rate reduction remains possible if markets experience corrections.

ANZ Senior China Strategist Xing Zhaopeng expects potential easing measures later in 2025. The timing may coincide with the fourth quarter, when annual policy reviews typically occur.

The government’s focus remains on long-term structural reforms outlined in the 15th Five-Year Plan. These strategic priorities take precedence over short-term growth stimulus measures.

The Fourth Plenary Session scheduled for October will likely influence future policy directions. Following this meeting, authorities may reassess near-term growth support policies based on updated economic conditions.

Rare Earth Exports Surge Ahead of Diplomatic Talks

China reported a significant increase in rare earth exports during August, with shipments reaching 7,338 tons. This represents the highest monthly volume recorded since early 2012, according to customs data.

These materials include specialised magnets essential for electronics manufacturing and defence applications. Rare earth elements have become a focal point in US-China trade negotiations.

China previously restricted rare earth exports in response to escalating trade tensions with the United States. Recent export recovery follows a temporary trade agreement between the two countries.

Trade negotiations between US and Chinese representatives concluded this week in Madrid. The discussions covered various bilateral trade issues, including technology transfer and market access.

President Trump announced plans for a Friday phone conversation with President Xi Jinping. The timing coincides with the spike in rare earth shipments, highlighting the strategic importance of these materials.

Beijing has not confirmed details of the proposed call or potential discussion topics. However, rare earth trade policy will likely feature prominently given its significance to both economies.