Why China’s central bank scuppered plans for its biggest monetary stimulus since the GFC

Chinese households still loathe to borrow due to pandemic hangover and property slump

After previously signalling the possibility of staging its biggest monetary stimulus since the Global Financial Crisis, China’s central bank decided to hold off on exorbitant cuts to interest rates in 2025.

Chinese businesses and households have proven reluctant to take out loans despite a downward trend in borrowing costs, as their balance sheets continue to recover from the lingering impacts of the Covid pandemic and a multi-year property slump.

Despite the absence of major reductions to its official interest rate, the Chinese central bank has nonetheless stepped up injections of liquidity into the financial system this year, in order to coordinate with Beijing’s debt-fuelled fiscal stimulus plans.

Chinese central bank holds back on rate cuts

Beijing made the landmark announcement that it would “implement moderately loose monetary policy” (实施适度宽松的货币政策) at the Central Economic Work Conference held in December 2024 - an event that serves as a key platform for the unveiling of policy plans for the upcoming year.

In spite of its ostensibly restrained phrasing, the statement was viewed as a signal that the Chinese central bank would dramatically loosen monetary policy in 2025.

This is because the last time that Beijing trotted out the phrase “moderately loose monetary policy” was 14 years prior, when the Chinese central government was busy implementing its four trillion yuan stimulus plan to deal with the fallout of the Global Financial Crisis (GFC).

The announcement by the Central Economic Work Conference triggered a rush for Chinese treasury bonds at the end of last year, with the 10-year yield dropping 88 basis points in 2024, for its largest annual decline in a decade.

Since the start of 2025, however, the Chinese central bank has remained highly restrained in its monetary policy adjustments, despite the turmoil created by Trump’s tariff wars, as well as the economy’s ongoing struggle with ailing domestic demand.

This year the central bank has only implemented a single reduction to its main policy rate - the seven-day reverse repo rate, with a cut of just 10 basis points in May.

This stands in contrast to two cuts applied to the policy rate in 2024, bringing it down by a total of 30 basis points.

The Chinese central bank has also been restrained in its use of reductions to the required reserve ratio. The reserve ratio refers to the volume of deposits that commercial lenders are required to stow with the central bank, constraining their ability to create new loans.

In 2025, the central bank reduced the required reserve ratio on just a single occasion, with a 50 basis point cut that coincided with the adjustment to the policy rate made in May

This reduction also fell short of loosening measures in 2024, which saw two cuts to the reserve ratio that collectively brought it down by 100 basis points.

In the wake of this restraint from the central bank, the yield on 10-year Chinese Treasury bonds rose by 16 basis points in 2025, instead of falling as would customarily be the case during an episode of significant monetary loosening.

Guan Tao, chief economist from Bank of China’s investment banking wing, points out that the rise in yields was also likely due to “the rush to buy [Treasuries] at the end of last year exhausting the benefits of monetary easing.”

Chinese households and businesses still loathe to borrow

It’s very likely that the Chinese central bank held off on further interest rate cuts due to concerns that such measures would fail to boost economic activity and end up being the macroeconomic equivalent of “pushing on a string,” as Keynes phrased it.

This is because Chinese households and businesses are still suffering from the lingering impacts of both the Covid pandemic and a protracted slump in the property sector, causing widespread injury to balance sheets.

These impacts have prompted domestic pundits and policymakers to point to inadequate domestic demand as the biggest challenge currently faced by the Chinese economy.

As a consequence, market actors may still prove reluctant to borrow and spend - irrespective of how much the cost and availability of credit improves.

The latest raft of data from the Chinese central bank would appear to vindicate this perspective.

In November, renminbi loans increased by 390 billion yuan, for a contraction of 188.3 billion yuan compared to the same period last year, as well as the fifth consecutive month that new loans have fallen short of the previous corresponding period.

Medium and long-term loans to enterprises increased by 170 billion yuan, 40 billion yuan less than the print for the same period in 2024.

Central bank data further indicates that household loans fell 206.3 billion yuan in November, for their second consecutive month of decline.

This tepid level of lending arrived despite the fact that Chinese regulators have used administrative measures to reduce the real cost of borrowing beyond the central bank’s cuts to the policy rate.

As of September this year, interest rates for new corporate loans and personal home loans have fallen by around 40 and 25 basis points respectively in year-on-year terms - far greater than the decline in the seven-day reverse repo rate.

As a consequence, Beijing has leaned more heavily on fiscal instead of monetary policy measures to keep GDP growth steady in 2025, with the objecttive of hitting the full year target of a 5% increase.

Central bank injects liquidity to complement fiscal spending

The Chinese central bank has no doubt exercised restraint in the use of two of its main monetary policy tools - adjustments to interest rates and adjustments to the required reserve ratio, relative to the expectations created by last year’s Central Economic Work Conference.

It has, however, stepped up liquidity injections via a range of other instruments that are part and parcel of China’s monetary policy toolkit.

The Chinese central bank made net injections of 591.6 billion yuan during the period from January to November, via open market operations tools including the medium-term lending facility (MLF), the standing lending facility (SLF) and pledged supplementary lending (PSL).

Guan Tao point out that this marks a stark reversal from net withdrawals of 3.09 trillion yuan for the same period last year.

As of the end of November, China’s broad M2 money supply had risen 8.0% year-on-year terms, for an acceleration of 0.9 percentage points compared to the same period last year.

Despite lacklustre loan growth, aggregate social financing (a broad measure of credit extension across the Chinese economy) had increased 8.5% in year-on-year terms, for an acceleration of 0.7 percentage points.

The liquidity injection and monetary expansion coordinated with an expansion in debt-fuelled fiscal spending, designed to compensate for ailing demand from households and private businesses, as well as the trade tensions casting a cloud over exports.

In March, China set its official deficit ratio at a record high of 4% of GDP - one percentage point higher than the year previously. The decision marked the first time that Beijing has opted to lift China’s deficit ratio beyond the Maastricht Treaty threshold of 3%.

In 2025, Beijing increased its issuance of ultra-long-term treasury bonds to 1.3 trillion yuan, from 1 trillion yuan in 2024, while local government bond issues surpassed the 10 trillion yuan (US$1.41 trillion) threshold for the first time on record.

This rise in debt-fuelled fiscal spending has made government bonds a main pillar of credit growth in China in 2025, with corporate bond issues also playing an increasingly important role.

“Government bonds are still the core support for growth in social financing,” said Yang Chang (杨畅), chief analysts at the policy unit of Zhongtai Securities, to China Business Herald.

“Ultra-long-term treasury bonds and special purpose government bonds have effectively driven the expansion in social credit.”