Few central banks, if any, are having a crazier 2025 than the People’s Bank of China.
When Governor Pan Gongsheng entered this most chaotic of years, his top priority was supporting economic growth as Beijing worked to address a property crisis that was fueling deflation.
As the second half of 2025 unfolds, Pan’s PBOC confronts higher US tariffs than even pessimists expected, the specter of recessions from the US to Japan and now outright conflict in the Middle East that could send oil prices and US bond yields skyrocketing.
The mini-crash in the US government bond market in April sent shockwaves Asia’s way. Along with Pan’s team, central bankers from Tokyo to Jakarta were forced to take evasive measures. As the so-called “bond vigilantes” pounced, markets everywhere were suddenly in harm’s way.
On May 20, Japan’s Ministry of Finance saw the weakest demand for 20-year bonds at auction since 2012. The “tail,” or that gap between the average and lowest-accepted prices, was the widest since 1987. Five weeks later, Tokyo’s sale of 40-year bonds didn’t go much better, causing fresh financial tremors.
The tariff chaos behind these market failures is complicating the Bank of Korea’s year, too. Just like Japan, Korea’s economy shrank 0.2% year-over-year in the first quarter. With Trump’s tariffs fanning inflation, BOK Governor Rhee Chang-yong now confronts upward risks, too.
Yet it’s hard for peers to rival the year Pan’s PBOC is having. On Friday, Pan will decide whether to cut one- and five-year loan prime rates.
In the short run, it’s quite a dilemma that Chinese consumers remain surprisingly willing to open their wallets. China’s retail sales in May jumped 6.4% from a year earlier, the fastest pace since late 2023. Clearly, government subsidy programs are lifting consumption. For now, at least.
Linghui Fu, a spokesperson for the National Bureau of Statistics, pointed to Beijing’s trade-in scheme for consumer goods. “The launch of an action plan to promote large-scale equipment renewal and trade-in of consumer goods has boosted sales and services consumption, which strongly supported the economy,” said Fu.
The rise of retail sales “came as a surprise,” said economist Zhiwei Zhang at Pinpoint Asset Management. Zhang cautions that with property prices still falling, the outlook for consumer sentiment is not great.
Yet headwinds abound. China’s industrial output fell 5.8% year on year in May. Fixed-asset investment rose just 3.7% year to date, weaker than economists expected.
Odds are, Pan’s PBOC will be under increasing pressure from President Xi Jinping’s government to add more liquidity to the economy.
“Given the prolonged property weakness, increased labor market stress and the unsustainability of export frontloading, we expect additional policy easing measures in the second half of the year,” Goldman Sachs economists wrote in a note.
“Though we caution that the urgency for significant stimulus in the near term appears lower given that year-on-year real GDP growth is on track to exceed 5% in the first half.”
The second half is hard to gauge. No one can say, for example, if Trump’s China tax — now 30% — might be 10% two months from now or 100%. Or whether Trump’s 25% auto tax will soon be 50% or zero. The same with his levies on steel and aluminum, the state of the “reciprocal” tariffs or the “unilateral” rate to come.
In an unbalanced, export-driven economy suffering from falling prices, this uncertainty makes it virtually impossible for Chinese companies to plan and strategize for the last five-and-a-half months of the year. Such uncertainty across a 1.4 billion-person economy is how recessions happen.
Pan’s challenge is even bigger than that. He’s on the front lines of Trump’s threats to fire Fed Chair Jerome Powell. The same goes for Trump’s often-expressed desire for a weaker dollar. And the clash on Capitol Hill over giant budget-busting tax cuts.
The May 16 move by Moody’s Investors Service to revoke Washington’s last AAA rating put an even more intense spotlight on the US’s nearly US$37 trillion national debt.
Analysts at Moody’s argued that “successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs. We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration.”
China is no longer the top holder of US Treasury securities. That dubious honor is all Japan’s, which is stuck with $1.1 trillion of Washington’s debt. Yet Asia and its nearly $3 trillion of Treasuries are uniquely on the frontlines of any Trump attempt to engineer a more advantageous exchange rate.
The only thing more perilous than a runaway dollar luring the lion’s share of global capital is a plunging one destabilizing markets everywhere.
“The central bank will likely revert to a wait-and-see mode while the US and China attempt to shore up their trade pact,” said economist Steve Cochrane at Moody’s Analytics.
Carlos Casanova, economist at Union Bancaire Privée, notes that “the economy is still facing structural headwinds, while the US-China ceasefire remains exceptionally brittle.”
Since the Geneva talks in mid-May, Trump has imposed measures affecting Chinese students and threatened to double steel and aluminium tariffs to 50%. “Additional support is likely needed to prevent a sharp slowdown,” Casanova said.
Yet Pan’s been rather cautious about rate cuts. One reason Pan isn’t cutting rates faster: a desire to preserve the progress Beijing has made in deleveraging the financial system in recent years. Pan’s team worries that cutting rates might incentivize bad lending and borrowing decisions.
Another: a weaker yuan might trigger default among property developers as they find it harder to make payments on offshore debt. Already, global investors are keeping close tabs on liquidity problems at China Vanke.
Putting yuan internationalization in jeopardy is another concern. For nearly a decade now, Xi’s government has been working to increase the yuan’s use in trade and finance. Beijing stepped up cooperation with the BRICS — Brazil, Russia, India, China, South Africa — and Global South nations to pivot away from the dollar-centric world order.
Reverting back to the beggar-thy-neighbor policies of the past might alarm international funds. It also might hurt the yuan’s chances of securing reserve-currency status.
A weaker yuan might have Japan, South Korea and other top Asian economies thinking they have a green light, political cover, to meddle with exchange rates. That might precipitate a chaotic race to the bottom in currency markets. That would not go unnoticed by the Trump White House, which threatens the biggest trade war in world history.
The Trump factor feeds into wildcard No 3: where trade tensions might leave the global economy by the end of 2025. This is arguably the least predictable policy outlook. Trump, after all, continues to change his mind about the direction of US tariffs. One day, they’re coming. The next day, Trump says he hopes taxes on Chinese goods won’t be necessary.
Even worse, perhaps, are fears that Trump might be actively sabotaging the US economy. “We can talk ourselves into recession, but this one feels like we’re being pushed into recession – it’s recession by design,” says Mark Zandi, chief economist at Moody’s Analytics.
Recent US jobs data “tell us the economy continues to grow,” says Steven Blitz, economist at TS Lombard. But, he notes, “the sum of Trump’s actions can yet skew the economy in any which way, including an implosion of capital spending.”
Keep in mind, Blitz says, “that presidents have been known to accept downturns in year one of their presidency. It is a free pass, they blame the previous president and take credit for the recovery. My base case is still growth and the Fed holding still. My base concern comes from the capital markets side, break trade and you will break the capital inflows that support the economy.”
As these dramas and others unfold, the PBOC is on the front lines like no other institution in Asia. And clearly making things up as it goes along.
Follow William Pesek on X at @WilliamPesek
