Global financial markets were closely watching two pivotal monetary policy decisions last week: the U.S. Federal Reserve cut interest rates by 25 basis points, while the People’s Bank of China (PBOC) opted to keep its benchmark lending rates unchanged for the fourth consecutive month. This divergence highlights the contrasting priorities of the world’s two largest economies.

China’s Decision to Keep Rates Unchanged

According to the PBOC’s official statement, the one-year Loan Prime Rate (LPR) was held at 3.0%, while the five-year LPR remained at 3.5%. These rates are the benchmarks for most new and outstanding loans, with the five-year LPR serving as the key reference for mortgage lending.

The last rate cut occurred in May 2025, when the LPR was trimmed by 10 basis points as part of Beijing’s effort to shore up its faltering economy. Since then, policymakers have favored stability over aggressive stimulus. Just days before the latest decision, the PBOC also left the seven-day reverse repo rate the main policy rate unchanged, despite the Fed’s easing.

Economists broadly anticipated this outcome, noting that Beijing is likely waiting for clearer signals from the domestic economy before rolling out additional easing measures.

Why the PBOC Remains Cautious

Prioritizing Stability and Risk Control

After years of debt-fueled growth and heavy reliance on infrastructure investment, Beijing is wary of fueling financial imbalances. Cutting rates too quickly could compress banks’ profit margins, pressure the yuan, and exacerbate systemic risks in the financial sector.

Positive Momentum in Financial Markets

With the CSI 300 index showing recent gains, maintaining current rates also reflects the PBOC’s desire to avoid unnecessary volatility. The offshore yuan even strengthened slightly after the announcement, signaling market approval of the central bank’s steady hand.

Weakness in Domestic Indicators

Despite financial market resilience, recent economic data paints a concerning picture:

• Retail sales slowed to 3.4% growth in August, underscoring weak consumer demand.

• Industrial output rose just 5.2%, the lowest in a year.

• Consumer inflation (CPI) fell more than expected, while producer prices (PPI) have remained in deflation for nearly three years.

• Exports grew only 4.4%, the weakest since February 2025, as U.S. trade policies and fading shipping momentum weighed on demand.

• Real estate indicators worsened further, with most housing metrics declining in August.

These trends suggest the domestic recovery remains fragile, justifying the central bank’s restraint.

Expert Perspectives

Hong Hao, Chief Strategist at Lotus Asset Management, noted that Beijing’s focus has shifted “from risk management to growth stimulation, from tolerating deflation to restoring economic momentum.” He emphasized the need for China to move away from debt-driven, inefficient investment and toward more sustainable recovery strategies.

Barclays forecasts China’s real GDP to grow only 4.5% in 2025, below the government’s “around 5%” target. The bank expects the PBOC to cut both the seven-day reverse repo rate and the LPR by 10 basis points in the fourth quarter, alongside a 50-basis-point reduction in the reserve requirement ratio (RRR) to boost liquidity.

Comparing China and the Fed

The divergence between the Fed and the PBOC underscores their differing economic realities.

• The Fed’s rate cut reflects cooling inflation and slowing growth in the U.S.

• China, however, faces the delicate balance of supporting growth while guarding against financial instability, particularly in its banking and property sectors.

This divergence also highlights the fragmented nature of global monetary policy. While the Fed’s easing may put pressure on capital flows and exchange rates, Beijing appears intent on prioritizing domestic risks over external alignment.

Implications and Outlook

Short-term impacts

• Businesses and households will not benefit from lower borrowing costs, potentially limiting investment and consumption.

• The property market, closely tied to the five-year LPR, remains under strain as mortgage rates stay elevated.

• A stable yuan helps maintain investor confidence and mitigates the risk of capital flight.

Medium- to long-term implications

• If Q3 data remains weak, the PBOC is likely to introduce modest easing measures in Q4, including rate cuts and an RRR reduction.

• Fiscal policy particularly government spending and infrastructure investment is expected to play a more prominent role in supporting growth.

• Balancing economic stimulus with debt sustainability will remain a central challenge for Beijing.

By holding its benchmark lending rates steady in September 2025, the PBOC reaffirmed its cautious approach choosing to “wait and see” rather than follow the Fed’s lead. While the U.S. moves deeper into its rate-cutting cycle, China is prioritizing financial stability and monitoring its domestic slowdown before taking further action.

The Chinese economy is now at a crossroads: either accept slower but more stable growth, or roll out stronger stimulus measures to meet its 5% target at the risk of higher debt and financial vulnerabilities. Whatever path Beijing chooses, the PBOC’s decisions will remain critical not only for China’s recovery but also for global markets in the months ahead.