The People’s Bank of China’s deputy governor, Zou Lan, announced that the bank will keep a moderately loose monetary policy. This strategy is designed to help meet the country’s annual economic growth target. The central bank plans to use several structural tools to support key areas of the economy. It also aims to improve the market-based interest rate system to enhance economic conditions. Zou also highlighted the need to ensure enough liquidity in the financial system. These steps aim to maintain economic stability and growth through the second half of 2025. From Zou’s comments, it is clear that Chinese policymakers are opting for further easing of monetary policy. However, this will be done carefully, not through sharp rate cuts, but with strategic liquidity support. The term “moderately loose” suggests they are ready to provide stimulus where necessary while still being cautious. It’s evident that the central bank is not depending just on traditional methods like lowering interest rates. Instead, they are focusing on targeted tools and strategies that direct credit to specific sectors, such as manufacturing upgrades, innovative businesses, or green energy projects. This indicates a preference for a smarter allocation of financial resources rather than just increasing the total money supply. By emphasizing improvements in a market-based interest rate system, Zou indicates a move toward relying more on market signals and pricing in lending. This could result in less direct intervention in the future, assuming stability improves, and a shift to tools that determine borrowing costs based on credit risk. This mirrors how mature markets operate, which may lead to more predictable rate changes over time. The emphasis on maintaining ample liquidity is particularly important. It suggests a willingness to provide short-term funding when necessary, especially if borrowing costs rise due to seasonal factors or payment cycles. Traders dealing with interest rate derivatives should closely monitor repo rate trends and Open Market Operations, which may be used more often to adjust overall liquidity. Overall, Zou’s comments reflect an effort to support growth while also refining credit markets. We are unlikely to see a surge of money like in past years, but expect the liquidity flow to remain steady. We are entering a phase where liquidity is flexible and interest rate tools will respond more to economic data than to political pressures. For short-term strategies in rate futures and swaps, this environment presents opportunities for relative value rather than risky directional bets. Market volatility may increase around economic data, especially concerning industrial recovery and consumer demand. However, a sustained trend change seems unlikely without shifts in inflation expectations or a change in the demand for Chinese exports. Until then, the main approach remains one of controlled easing. Keep an eye on the central bank’s actions in interbank markets. We anticipate more refined forward guidance, likely linked to economic indicators if employment and output data significantly differ from forecasts. Recent comments provide more than just insight—they outline a flexible approach. This framework prepares us for short-term changes and medium-term adjustments with clearer signals.

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