China steps up policy support amid rising uncertainty
The desk views China’s recent policy shifts as a significant attempt to mitigate economic stagnation, indicating a more proactive approach amid rising global uncertainties. As highlighted in recent commentary, the People's Bank of China has initiated measures such as lowering the one-year pledged supplementary lending rate to 1.5% and introducing nationwide mortgage interest subsidies for first-time homebuyers, reflecting a targeted rather than broad-based strategy to stimulate growth. With the economic indicators suggesting sustained pressure on credit demand, particularly in sectors like housing and investment, policy continuation or expansion appears likely if current trends persist. Per the full note , while trade relations with major partners remain stable, ongoing global challenges could prompt further fiscal stimulus by policymakers before year-end.
What the desk is arguing
The current sentiment among policymakers in China suggests a commitment to addressing economic headwinds through targeted interventions. The adjustments made by the State Council, including rate cuts and fiscal incentives for the property sector, illustrate a clear pivot towards a focus on domestic economic stability. Per the full note , these measures are anticipated to provide modest support amid deteriorating credit demand.
Moreover, the anticipated impact of President Xi's recent meeting with US leaders underscores a fragile but stable trade environment, as both nations seek to uphold their agreement through 2027. This interaction might cushion some external pressures, yet economists note that more drastic measures may still be needed if economic momentum fails to pick up leading into 2024.
Where it sits in our coverage
Our consensus target for USD/CNY currently sits at 1.075, with a range between 1.04 and 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This desk’s outlook aligns closely with jpmorgan, which shares a relatively optimistic perspective based on expected modest support from China’s recent measures. However, it positions near the middle of the consensus spread, reflecting a cautious stance among analysts regarding potential economic stagnation ahead.
How other firms see it
Several firms, including jpmorgan and others, are aligned in their belief that targeted measures from the PBoC could provide temporary buoyancy in growth. In contrast, firms like bofa lean towards a more conservative perspective, indicating potential struggles in sustaining momentum due to underlying economic weaknesses.
Market participants should also consider related currency pairs like AUD/USD, which historically reacts to shifts in Chinese economic policy, particularly given Australia’s trade exposure to China. Likewise, USD/CAD could showcase similar patterns depending on the resilience of commodity prices tied to Chinese demand.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01China is implementing targeted policy adjustments to combat economic stagnation.
- 02The PBoC cut the one-year pledged supplementary lending rate to 1.5% as part of these measures.
- 03Ongoing global risks could necessitate further fiscal stimulus before year-end.
- 04Trade relations with the US and EU have stabilized, providing some external support.
Market implications
Watch for any shifts approaching the indicated consensus target of 1.075 for USD/CNY. If economic indicators from China continue to show weakness, expect further policy adjustments that could drive the currency outside its current range.
Risks to this view
Should external factors shift dramatically, such as escalating geopolitical tensions or sharper-than-expected declines in trade with the US and EU, the current projections might be invalidated. Additionally, a rapid increase in domestic inflation could force the PBoC off its current accommodative path.
Articles China steps up policy support amid rising uncertainty Published 09:54 China Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download China’s recent State Council meeting appeared to signal a more proactive policy push amid flagging growth. Even though trade ties with key partners such as the US and EU look more stable, global risks abound as 2027 approaches Lynn Song Trade ties may be calmer, but Beijing's global challenges are far from over State Council meeting triggers new targeted policy support China's State Council meeting on 28 September called for stronger countercyclical policy adjustments. The following day, the People’s Bank of China cut the one-year pledged supplementary lending rate by 25bp to 1.5%.
It also increased re-lending quotas for technology and equipment upgrades and for rural and small businesses. Beijing announced the first-ever nationwide mortgage interest subsidy for first-time homebuyers to boost the struggling property market. The package maintains an accommodative policy direction but relies on targeted tools and fiscal-monetary coordination rather than broad-based rate cuts.
Overall, these moves are likely to offer modest support to investment and housing at a time when credit demand is likely to remain under pressure amid weak sentiment. There remains room for further support measures, such as policies to boost employment and incomes and other measures to boost domestic demand. Should economic momentum remain subdued into year-end, policymakers may respond with further fiscal stimulus and a broader easing of monetary policy.
External trade ties stable for now, but risks remain President Xi’s visit to the US in September continued the “constructive strategic stability” framework agreed in May. It secured a short-term extension of the trade truce to January 2027, and $30bn of tariff cuts on both sides. It’s possible the leaders will meet again at the APEC summit in Shenzhen on 18-19 November and at the G20 meetings in Florida on 14-15 December.
Aside from the US, possible tensions with the EU have also grabbed the spotlight over the past month. A joint letter from German Chancellor Friedrich Merz and French President Emmanuel Macron calling for tougher trade tools signals increasing risk that we could see trade barriers come into effect. EU-China trade talks concluded with an initial agreement to ease tensions.
It includes reducing hybrid vehicle exports from China to the EU, improving market access, and increasing medical equipment imports from the EU to China. This should keep trade ties stable for now, but further negotiations are still likely ahead. With the EU representing around 14-15% of China’s total exports, the second-largest export market after ASEAN, maintaining stable trade ties remains important for China's outlook .
China’s inflation remains the exception to the rule We’ve seen inflation rise in many economies across the world. But prices in China have largely remained under control. Most worry about a return to deflation more than out-of-control inflation.
Two factors are curbing China’s inflation: food and housing. Together, these represent over half of China’s CPI basket. Food inflation has been kept low amid an extended downturn in China’s pork price cycle.
Supply has been aided by advancements in hog megafarms, low feed prices, and general efforts to maintain high levels of food self-sufficiency. Housing prices, meanwhile, have declined amid China’s multi-year property bust. On net, China’s inflation looks likely to end the year solidly in positive territory.
We expect 0.9% CPI inflation in 2026, firmly positive after three years of flirting with deflation. However, it will once again fall short of the target, raising questions about whether China has successfully escaped deflation. While we believe the worst is likely behind us, downside risks remain.
PPI inflation, on the other hand, averaged 2.0% in the first eight months of the year, peaking at 4.1% year-on-year in June. This suggests industrial prices have moved out of deflation, driven by upstream and select technology sectors. Yet this level is generally still a fair bit lower than in other Asian economies this year.
China Asia Pacific Asia Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Author Lynn Song Chief Economist, Greater China Lynn Song joined ING in January 2024 as the Chief Economist for Greater China.
Prior to joining ING, he worked at China Construction Bank International, China Merchants Securities (HK), and Haitong… In this article State Council meeting triggers new targeted policy support External trade ties stable for now, but risks remain China’s inflation remains the exception to the rule
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