The People’s Bank of China (PBOC), the National Administration of Financial Regulation (NAFR), and the China Securities Regulatory Commission (CSRC) introduced a stimulus package on May 7 to ease the pressure of tariffs. Several key measures are listed as the following:

a. To reduce the reserve requirement ratio (RRR) by 0.5 percentage points, which will release liquidity of around RMB 1 trillion ($138.5 billion) to the market, taking effect on May 15.

b. To reduce the policy rate to 1.4% from 1.5%, which will be effective on May 8. The cut in the policy rate is expected to lower the Loan Prime Rate (LPR) among banks by 0.1 percentage points, which in turn reduces borrowing costs in the real economy.

c. To reduce interest rates by 25 basis points on housing provident fund mortgages, which could relieve mortgage repayment costs for residents, and accordingly, to boost residents’ consumption in other sectors.

d. Two new tools: to set up funding of RMB 500 billion ($69.25 billion) to support services consumption and eldercare, as well as tech innovation bond investments.

e. Addition: some targeted support measures from the banking and insurance sectors will be implemented for enterprises significantly affected by tariffs, though specific policies have yet to be introduced.

These measures might have already been under consideration since early April, following the reciprocal tariffs announced by the U.S. Affected by the tariffs, China’s manufacturing PMI declined 1.5 percentage points MoM to 49.0 in April. Particularly, the sharpest decline was seen in the index of new export orders, which fell by 4.3 percentage points MoM to 44.7. In addition, the CNY exchange rate has appreciated rapidly since early April—from 7.35 to 7.21—which makes the current timing relatively appropriate for easing monetary measures.

While the magnitude of the RRR and rate cuts aligned with market forecasts, the overall strength of the package slightly surpassed expectations, offering a supportive signal to the market.

From the perspective of the CNY exchange rate, significant depreciation seems unlikely this year, and 7.35 may serve as a critical threshold or bottom line.

Firstly, the CNY exchange rate is generally under the central bank’s management, and 7.35 seen in early April was already the highest record since 2008. With CNY now hovering around 7.23, it would be difficult to break through 7.35 without a crisis. Meanwhile, the central bank may also aim to limit the depreciation of the CNY against other major currencies, such as the euro, in order to avoid trade frictions with non-U.S. economies. Hence, CNY is projected to further depreciate but trade below 7.3 by the end of Q2.

Secondly, compared with the previous trade war, the U.S. now faces greater challenges in terms of its economic fundamentals and the international status of the dollar. As a result, the depreciation of CNY against the USD this year is likely to be moderate.