On Wednesday, the People’s Bank of China (PBOC) Governor, Pan Gongsheng, announced that the financial institution would cut banks’ reserve ratio requirement by 0.5%. The governor revealed that the reserve requirement ratio (RRR) will release about 1 trillion yuan ($178.2 billion) in liquidity.

PBOC’s governor said the move would raise liquidity and stimulate China’s economic growth after an ongoing trade war with the U.S. He also said the government would increase the amount of money available for factory upgrades and other innovations, elder care, and other service businesses.

PBOC governor plans to cut banks’ reserve requirement ratio

Boom. Breaking news: China to cut a series of rates:

Reserve ratio requirement by 0.5ppt
7-day reverse repo to 1.4% (from 1.5%)
Structural tools rate by 0.25 ppt

Futures gap higher ahead of open, minutes away pic.twitter.com/1JpRi57mVp

— David Ingles (@DavidInglesTV) May 7, 2025

PBOC Governor Pan Gongsheng stated on May 7 that the bank would cut the amount of cash that financial institutions must hold as reserves by 50 basis points. PBOC noted it will be the first reduction in 2025, with policymakers seeking to boost liquidity and prop up economic growth amid a heightened trade war with the U.S.

Gongsheng told reporters on Wednesday that the reserve requirement ratio (RRR) will generate roughly 1 trillion yuan in liquidity, approximately $178.2 billion. He did not say when the cut will kick in, but the reduction follows two 50 basis point cuts for all banks that took effect in February and September last year.

Gongsheng acknowledged that Beijing’s reverse repo rate on commercial banks’ deposits with PBOC was also reduced to 1.4% from 1.5%. The People’s Bank of China’s lending rate to commercial banks was also cut by 0.25 percentage points to 1.5%. The financial institution also reduced interest rates on five-year housing loans. 

As China battled a trade war with the U.S. after President Trump imposed triple-digit tariffs on Chinese goods, the country pledged at a key meeting in late April to cut banks’ reserve requirement ratio “in a timely manner.” Xing Zhaopeng, Senior China Strategist at ANZ, argued that the country’s domestic economy must be strong enough before Beijing starts any protracted trade negotiations.

China plans trade talks with the U.S.

#BREAKING China Commerce Ministry:🇨🇳China decides to agree to engage with🇺🇸the U.S. side after evaluation.@MOFCOM_China "American senior officials frequently released signals to adjust tariffs and actively sent information to China via multiple channels, expressing intention to… pic.twitter.com/5QNUiATpsF

— Shen Shiwei 沈诗伟 (@shen_shiwei) May 7, 2025

China and the U.S. announced late May 6 plans for talks between Treasury Secretary Scott Bessent, U.S. Trade Representative Jamieson Greer, and Chinese Vice Premier He Lifeng later this week in Geneva, Switzerland. 

Trump’s tariffs have begun to take a toll on China’s export-dependent economy, which has also faced pressure from a prolonged downturn in the property sector. The world’s two largest economies remained entangled in a standoff over Trump’s tariffs of as high as 145% on imports of most Chinese products. Beijing also retaliated with up to 125% tariffs on U.S. goods and ceased buying most American farm products.

“We do not expect the reaction to be euphoric. Point being, any trade resolution would likely take a long time, and in the near term, there may be some piecemeal exemptions or tariff reductions on certain goods.”

-Tan Jing Yi, Market Economist at Mizuho Bank.

The trade talks have come at a time when both parties have remained adamant, at least in public, about not compromising on the tariffs. In a report, Stephen Innes of SPI Asset Management said that the talks could be the pivot point that either locks in fragile confidence or re-ignites the trade war.

Both economies have shown signs of strain in recent weeks, after companies and consumers rushed to beat tariff increases. The U.S. economy plummeted by 0.3% in January-March. China’s economy grew at a 5.4% annual pace in the first quarter of the year after factories elevated production to fill a surge in orders.

News of plans to boost the Chinese economy and for China-U.S. trade talks have pushed share prices up more than 2% in Hong Kong and 0.5% in Shanghai early Wednesday, with U.S. futures also advancing. Tan Jing Yi of Mizuho Bank argued that the muted movements were to be expected.

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