China rate cuts likely in fourth quarter amid growth concerns: Goldman Sachs
News Summary
Goldman Sachs forecasts an increasing likelihood of the People's Bank of China (PBOC) easing its monetary stance in the fourth quarter of 2025, driven by slowing economic momentum and mounting pressure on policymakers to support growth. The projection includes a 10-basis-point policy rate cut and a 50-basis-point reduction in the reserve requirement ratio, potentially occurring as year-on-year growth decelerates sharply towards 4% from a high base. While the PBOC's third-quarter Monetary Policy Committee meeting maintained a dovish bias without new easing signals, Goldman Sachs analysts noted a subtle shift in the PBOC's economic description from “showing positive momentum” to “making strides while maintaining stability,” suggesting a more cautious outlook. However, the analysts also cautioned that the data-dependent nature of PBOC decision-making leaves open the risk of no action if full-year growth remains on track for the “around 5%” target.
Background
The People's Bank of China (PBOC) is the central bank of mainland China, responsible for formulating and implementing monetary policy. Its key monetary policy tools include open market operations, the reserve requirement ratio (RRR), and policy interest rates (such as the Medium-term Lending Facility, MLF rate). These tools are used to manage liquidity, guide market interest rates, and influence overall economic growth and inflation. Throughout the year, market attention has been keenly focused on China's economic growth trajectory, especially amidst global economic uncertainties and domestic structural challenges. The Chinese government's annual economic growth target is typically set at "around 5%," and the PBOC's monetary policy decisions are closely linked to achieving this objective.
In-Depth AI Insights
Despite recent cautious signals from the PBOC, what underlying pressures are compelling it towards Q4 easing? The primary driver is the significant slowdown in China's economic growth momentum, with year-on-year growth projected to decelerate sharply towards 4% from a high base last year, falling short of the official "around 5%" target. Furthermore, the PBOC's subtle shift in economic description from "positive momentum" to "making strides while maintaining stability" indicates a more cautious assessment of current conditions, implying a need for more robust supportive measures. How might this potential monetary easing impact different sectors of the Chinese economy and investor sentiment, particularly considering the "data-dependent" caveat? - Rate cuts and RRR reductions would directly lower corporate financing costs, stimulating credit demand, and likely benefit capital-sensitive sectors such as real estate, infrastructure, and manufacturing. This could help stabilize market confidence, especially given current challenges in the property sector. - However, such easing could put downward pressure on the RMB exchange rate and potentially encourage capital outflows if the yield differential between China and major economies (e.g., the U.S. under the Trump administration's potentially higher rates) widens further. - The "data-dependent" caveat introduces policy uncertainty, requiring investors to remain cautious in asset allocation and to closely monitor subsequent economic data, which might temper the immediate incentive for long-term capital inflows from easing alone. What are the risks if the PBOC chooses inaction, and what measures might Beijing pursue beyond monetary policy to address growth challenges? - If the PBOC opts for inaction, economic growth could face further deceleration, especially if external demand remains weak and internal structural issues are not effectively addressed. This could lead to increased employment pressure and heightened social stability risks. - In such a scenario, Beijing might intensify fiscal policy support, such as increasing infrastructure investment, implementing tax cuts and fee reductions, or providing direct consumer subsidies to stimulate domestic demand. - Additionally, the government might prioritize structural reforms, such as deepening state-owned enterprise reforms, optimizing the business environment, or taking more decisive actions to resolve structural issues in the real estate market, aiming to fundamentally boost economic vitality rather than relying solely on aggregate monetary policy.