Silver's Surge Ends as Tariff Fears Fade

New bank loans in China climbed more than expected in December, signaling that government stimulus measures may be starting to revive a credit appetite that has been weakened by a property market crisis and soft domestic demand.

Chinese banks extended 910 billion yuan ($130.54 billion) in new loans during the month, a sharp increase from 390 billion yuan in November, according to data from the People's Bank of China (PBOC). This figure surpassed the 800 billion yuan median forecast from a Reuters poll of 19 analysts, though it remained below the 990 billion yuan recorded in December 2024.

Full-Year Lending Hits Four-Year Low

Despite the year-end rebound, the data for the entire year painted a weaker picture. New yuan loans for all of 2025 totaled 16.27 trillion yuan, the lowest annual figure since 2018 and a notable drop from the 18.09 trillion yuan issued in 2024.

This weakness in borrowing highlights the ongoing economic challenges facing policymakers. While China reported a record trade surplus of nearly $1.2 trillion in 2025, authorities have struggled to spark household consumption and counteract a persistent slump in the property sector.

Corporate Borrowing Up as Household Loans Contract

A deeper look into the December figures reveals a clear divergence between corporate and household credit demand.

• Corporate Loans: Grew by 1.07 trillion yuan.

• Household Loans: Shrank by 91.6 billion yuan, following a 206.3 billion yuan contraction in November.

The continued decline in household borrowing, which includes mortgages, underscores the lack of confidence in the housing market. Meanwhile, the growth in corporate lending suggests that policy support, such as the 500-billion-yuan financial tool introduced in September to fund major projects, may be gaining traction.

PBOC Eases Policy as Key Indicators Stabilize

In response to economic headwinds, Beijing has committed to stabilizing the housing market and boosting domestic demand through investments in national projects and a consumer trade-in scheme.

Reinforcing these efforts, the PBOC announced on Thursday it would lower the interest rate on some of its structural monetary policy tools by 25 basis points, effective January 19, to further stimulate the economy.

Broader monetary and credit indicators from the central bank showed a mixed but stable picture in December:

• Outstanding Yuan Loans: Grew 6.4% year-over-year, matching November's pace and slightly ahead of the 6.3% forecast.

• Broad M2 Money Supply: Grew 8.5% year-over-year, accelerating from 8% in November and beating the 8% forecast.

• M1 Money Supply: Growth slowed to 3.8% from 4.9% in the prior month.

• Total Social Financing (TSF): Outstanding TSF, a broad measure of credit and liquidity, grew 8.3% from a year earlier, down from 8.5% in November.

Hopes for an imminent Federal Reserve rate cut are fading as new economic data reveals that inflation is not cooling as quickly as policymakers would like. The latest figures on wholesale and consumer prices will be a critical input for the Fed's economic projections through 2026 and will heavily influence its interest rate decisions this year.

Recent reports suggest that the path back to the Fed's 2% inflation target remains challenging, making a pivot to easier monetary policy less likely in the near term.

Inflation's Stubborn Grip on the Economy

A delayed report from the Labor Department showed that wholesale prices rose by 3% in November, accelerating from a 2.8% increase in October. A surge in energy costs was a primary driver of this increase.

Even after excluding volatile components like food, energy, and trade services, the core measure of wholesale prices climbed 3.5% for the year ending in November. This figure matches the high set in March, indicating persistent underlying price pressures. According to Stephen Brown, an economist at Capital Economics, the impact of tariffs on these numbers appears minimal for now.

This trend was echoed in consumer price data for December. The core Consumer Price Index (CPI), which strips out food and energy, registered at 2.6%. While slightly below the 2.7% forecast by experts, this rate has held steady since September and remains well above the Federal Reserve's official 2% goal.

Based on these figures, Brown projects that the Personal Consumption Expenditures (PCE) index—the Fed’s preferred inflation gauge—could rise to 3%. The PCE index had been stable at approximately 2.8% for the previous three months.

Corporate America Feels the Squeeze

According to the Federal Reserve's "Beige Book," a collection of economic anecdotes from across the country, tariffs were a significant concern for businesses in early January. Many companies that initially absorbed these extra costs are now beginning to pass them on to customers to protect their profit margins.

However, some sectors, such as restaurants and retail, have shown less willingness to raise prices. The general expectation among businesses is that prices will remain elevated as they navigate these increased expenses.

Despite these price pressures, the broader economy has demonstrated resilience. Eight of the twelve Federal Reserve districts reported minor economic improvement, a step up from the preceding four months when most regions saw little to no growth.

A Split Emerges Among Fed Officials

The latest economic data has sparked a range of interpretations among Federal Reserve leaders regarding the future path of monetary policy.

The Optimistic Case for Gradual Easing

Anna Paulson, president of the Philadelphia Fed, expressed cautious optimism. She argued that price increases stemming from tariffs are mostly confined to goods, not services, and are unlikely to fuel long-term inflation. Paulson projects that goods inflation will return to the 2% target by the end of 2026, with the most significant impact felt in the first half of this year.

"I am feeling cautiously optimistic," Paulson noted, suggesting that even if the full-year inflation figure seems high, the short-term trend could hit the 2% mark by December. If inflation continues to moderate and the labor market remains stable, she anticipates "modest" rate reductions later this year.

The Aggressive Push for Lower Rates

In contrast, Fed Governor Stephen Miran is advocating for more significant rate cuts. He predicts that declining prices in services and housing will offset the rise in goods prices. Miran has penciled in 150 basis points of rate cuts for 2026, a stark contrast to the single 25-basis-point cut anticipated by most of his colleagues.

Miran's argument centers on the belief that the "neutral rate"—the interest rate level that neither stimulates nor restricts the economy—has fallen. He attributes this shift to lower population growth from changing immigration patterns, which he believes will eventually cool inflation. He also acknowledged it remains an "open question" what is driving goods prices higher if not tariffs, suggesting lingering pandemic effects or tech export restrictions as possibilities.

The Cautious Stance on the Final Mile

Neel Kashkari, president of the Minneapolis Fed, remains more uncertain. While he agrees that inflation is on a downward trajectory, he is unsure whether it will settle at 2.5% or remain higher by the end of the year.

Kashkari highlighted a growing divide in the economy: high-income families are faring well, but lower-income Americans are struggling with the high cost of living, not a lack of employment. He cautioned that cutting interest rates prematurely to support the job market could backfire, worsening inflation for the very families it aims to help.

"Overall, the economy seems quite resilient," Kashkari said. He pointed to strong consumer spending and new investments in artificial intelligence as key growth drivers. The economy's failure to slow more significantly despite high interest rates has led him to question whether current monetary policy is as "tight" as it appears.

What to Expect from the Fed's Next Meeting

Following a series of three rate cuts last autumn, the Federal Reserve is now widely expected to hold its benchmark interest rate steady in the 3.5% to 3.75% range at its upcoming meeting later this month.

China's central bank has signaled it has room to lower both interest rates and bank reserve requirements, while also moving to cut the cost of its targeted lending tools to provide more direct support to the economy.

People's Bank of China (PBOC) Deputy Governor Zou Lan stated Thursday that the central bank sees "some space" to reduce the reserve requirement ratio (RRR) and key policy rates this year. This comes as the PBOC announced it will lower interest rates on its structural monetary policy tools by 0.25 percentage points, effective Monday. The adjustment brings the one-year rate for several relending facilities down to 1.25% from 1.5%.

These moves underscore a strategy focused on targeted adjustments to aid an economy facing challenges from weak demand and structural imbalances. The signal for broader easing follows a year of limited action, where the PBOC only delivered a single 10-basis-point cut to its policy interest rate in 2025—well short of the 40 to 60 basis points of easing many analysts had anticipated.

Zou also noted that improved interest margins at commercial banks create the necessary conditions for reducing the main policy interest rate, though he did not provide a specific timeline.

Yuan Stability Remains a Key Priority

Addressing recent currency fluctuations, Zou asserted that China has "no need" to devalue the yuan to gain a competitive advantage in global trade. He attributed the yuan's recent gains against the U.S. dollar to a weakening greenback and an easing of geopolitical tensions, rather than a fundamental shift in policy.

The yuan has strengthened over the last 12 months, breaking the key 7-per-dollar level last month for the first time since May 2023. This rally has been supported by several factors:

• Broad-based weakness in the U.S. dollar

• China's expanding trade surplus

• Signs of an improving domestic economy

• Inflows of capital ahead of the Lunar New Year

Zou reiterated that the PBOC is committed to preventing "overshooting" in the currency market and will work to keep the yuan at a "reasonable and balanced equilibrium." He emphasized that the exchange rate has been "basically stable" in recent years and that market forces will continue to play the decisive role.

Tackling Deflation and Bolstering Credit

On the domestic front, Zou highlighted recent positive developments in China's inflation outlook. He said that ensuring a "reasonable recovery in prices" has become a key objective for monetary policy in 2026, as officials aim to steer the world's second-largest economy away from deflationary pressures.

To refine its liquidity management, the central bank also plans to gradually increase its trading of government bonds in its open market operations.

Furthermore, the PBOC is rolling out new measures to boost credit to specific sectors. This includes establishing a dedicated relending program for private companies and increasing quotas for loans aimed at technological innovation. To amplify this support, the PBOC will also provide an additional 500 billion yuan in lending for small businesses and the agricultural sector.

China's economic growth is projected to slow to 4.5% in 2026 and hold that pace through 2027, according to a Reuters poll of 73 economists. This forecast increases pressure on policymakers to deliver more stimulus as they confront deep structural issues to secure the nation's long-term economic health.

For 2025, gross domestic product (GDP) is expected to have expanded by 4.9%, meeting the government's target of around 5%. This performance was supported by strong exports and existing policy measures, demonstrating remarkable resilience amid global challenges.

However, the economy's reliance on external demand highlights significant underlying vulnerabilities, including weak domestic spending, a prolonged property slump, and persistent deflationary pressures.

Export Boom Masks Domestic Weakness

China's economic strength in 2025 was largely driven by its export sector, which benefited from smaller-than-expected U.S. tariff hikes and a successful push to diversify markets. This allowed policymakers to keep stimulus measures modest.

The country reported a record trade surplus of nearly $1.2 trillion in 2025, fueled by booming exports to non-U.S. markets. This strategy helped producers build global scale to counter sustained pressure from the Trump administration.

Despite this external success, recent data points to a slowdown. Growth in the fourth quarter of 2025 likely cooled to 4.4% year-over-year, down from 4.8% in the third quarter, marking the weakest pace in three years. On a quarterly basis, the economy is forecast to have grown 1.0% in the fourth quarter, a slight dip from 1.1% in the previous quarter.

Rising Trade Tensions Cloud Outlook

The economic outlook for 2026 is clouded by the prospect of rising global trade protectionism and unpredictable U.S. trade policies. President Donald Trump has threatened to impose a 25% tariff on countries that trade with Iran, adding another layer of uncertainty.

"External demand was the biggest positive surprise in 2025," noted Larry Hu, chief China economist at Macquarie. "Should exports disappoint in 2026, it would trigger additional domestic stimulus from Beijing to defend its growth target."

Hu added that the scale of any new stimulus will largely be determined by the severity of an export slowdown.

The Challenge of Rebalancing China's Economy

Economists warn that deep structural imbalances pose a significant risk to China's long-term growth and its ambitions in high-tech industries. The country's economic model remains heavily skewed toward investment over consumption.

Key structural challenges include:

• Low Household Consumption: Chinese household consumption accounts for roughly 40% of the economy, about 20 percentage points below the global average.

• High Investment: Conversely, investment is approximately 20 percentage points higher than the global average.

• Unsustainable Gap: This imbalance is seen as increasingly unsustainable and a drag on broader industrial activity.

Chinese leaders have vowed to "significantly" increase household consumption's share of the economy over the next five years. Many policy advisers believe the target should be to lift this ratio to 45% by 2030. However, efforts to rebalance have been complicated by rising debt levels and external pressures.

Policy Response: More Stimulus Expected

At a key economic meeting in December, Chinese leaders pledged to maintain a "proactive" fiscal policy to support economic growth, which analysts expect will be targeted at around 5% for the year.

The People's Bank of China (PBOC) has signaled its readiness to provide monetary support. The central bank has pledged to cut the reserve requirement ratio (RRR) and interest rates in 2026 to ensure ample liquidity.

Analysts polled by Reuters expect the PBOC to cut its key policy rate—the seven-day reverse repo rate—by 10 basis points in the first quarter. Meanwhile, consumer price inflation is forecast to rise to 0.7% this year and pick up further to 1.0% in 2027, after remaining flat in 2025.

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