As of July 8, 2025, the People’s Bank of China (PBOC) held its benchmark 1-year Medium Lending Facility (MLF) rate at 2.75%, maintaining its cautious monetary stance amid signs of fragility in the world’s second-largest economy. With manufacturing momentum fading and local debt risks resurfacing, Beijing’s dilemma between fostering growth and preserving financial stability has never been starker.
Factory activity teeters on edge as consumers pull back
June’s official PMI came in at 50.2, barely above contraction. Export orders declined for a fourth consecutive month, underlining global demand headwinds as U.S. and EU buyers trim inventories. Meanwhile, retail sales rose 4.8% YoY, missing expectations of 5.1%, with spending skewed toward essentials over big-ticket items.
“We see a softening consumer pulse that reflects a deeper caution. Households remain worried about future income, which dampens durable goods and property-related consumption,” said Claire Wu, an economist at Nomura in Hong Kong.
Local debt crackdown reignites stress in banks and provinces
In parallel, Beijing intensified efforts to curb off-balance-sheet borrowing by local governments, a problem the State Council labeled an “increasing systemic risk.” New guidelines unveiled last week target shadow financing platforms, aiming to force provinces to unwind opaque debt piles accumulated over the last decade.
This is already rippling through markets. Shares in smaller regional lenders fell 2.1% on average, as investors price in potential restructurings. While long-term bond yields dipped, credit spreads widened on lower-tier financials.
Will policy tilt more dovish in Q3?
The PBOC’s language remained cautious: it emphasized “targeted liquidity tools” for SMEs and green finance, avoiding broad easing. Analysts at Goldman Sachs predict the bank will only shift decisively if Q3 data including property sales and industrial profits deteriorates sharply.
“There’s still scope for an RRR cut or more credit lines to policy banks, but not the floodgate stimulus of old,” noted Paul Ji of HSBC.
China’s balancing act grows trickier by the quarter: tame enough growth to avoid defaults, but not so much stimulus as to refuel financial bubbles. As cracks emerge in manufacturing and local finances, the next three months will test whether Beijing can steer toward a soft landing or be forced into deeper interventions that revive old debt ghosts.
(As of July 8, 2025)
