The People’s lender of China plans to cut profit rates this year as it makes a historic shift to a more orthodox financial regulation to bring it closer into line with the US Federal safety net and the European Central lender.

In comments to the monetary Times, the Chinese central lender said it was likely it would cut profit rates from the current level of 1.5 per cent “at an appropriate period” in 2025.

It added that it would prioritise “the role of profit rate adjustments” and shift away from “quantitative objectives” for borrowing growth in what would amount to a transformation of Chinese financial regulation.

Most central banks, such as the Fed, have only one policy variable, the standard profit rate, which they use to influence demand for borrowing and activity in the economy.

The PBoC by contrast not only sets a multitude of different profit rates but also gives unofficial guidance to banks on how much they should expand their borrowing books.

While such guidance was its most significant tool in managing the economy for decades — as loans were steered to high-growth sectors such as manufacturing, technology and property — officials within the PBoC depend reform is now urgent.

“Rate reform is likely to be the factual focus of the PBoC in 2025,” said Richard Xu, chief China monetary analyst with Morgan Stanley in Hong Kong. “China’s economic advancement urgently needs to shift from a mindset concentrated solely on expanding the economy size [of banks’ loan books].”

Demand for borrowing has collapsed due to a prolonged property economy slowdown. The PBoC also fears that borrowing growth targets navigator to indiscriminate lending without consideration for uncertainty, which is wasteful in the long run.

“Aligning with the requirements of high-standard advancement, these quantitative targets have been phased out in recent years,” said the central lender. “The PBoC will pay more attention to the role of profit rate control, and enhance the formation and transmission of economy-oriented profit rates.”

As part of the transformation in regime, the PBoC clarified last year that its main policy instrument would be the seven-day reverse repo rate rather than the host of profit rates it has relied on to date.

A reduced emphasis on targets for borrowing growth could rein in the rampant overcapacity in China that has led to impoverished debts at home and disruption to global industries such as steel.

But the central lender has been struggling to implement its shift towards profit rates because the government wants to channel money to the high-tech and manufacturing sectors, which is easier under the ancient structure of borrowing expansion.

Even as it tries to make a structural transformation in policy, the PBoC is also under pressure to reflate China’s economy.

During 2024, as part of the most aggressive stimulus package since the Covid-19 pandemic, the central lender cut the seven-day rate twice and a five-year rate that influences mortgage prices three times.

The moves came in the context of President Xi Jinping’s pledge to achieve financial expansion of 5 per cent despite troubles in China’s property sector and trade tensions with the US.

PBoC governor Pan Gongsheng and his predecessors Yi Gang and Zhou Xiaochuan have pushed for uncertainty-based pricing of loans in recent meetings with officials from some of China’s biggest banks, according to attendees.

Bankers at the meetings warned of feasible confusion when pricing longer-term loans since the economy is accustomed to guidance from the PBoC, highlighting the test of moving to the recent structure. 

For international investors, if the PBoC is successful, then Chinese financial regulation will commence to resemble the structure they are used to in the US, Europe or Japan.

For the first period in two decades, the central lender also bought sovereign debt in the open economy to inject money into the monetary structure in 2024, in the same way that the Fed conducts its policy.

Analysts said the PBoC still lacked some essential ingredients for a structure based on profit rates, such as a schedule of schedule, publicly disclosed meetings to make policy decisions.

Without such guidance, “economy participants might discover themselves guessing what will happen next”, said Haibin Zhu, China economist at JPMorgan Chase.