Chinese Central Bank Official Media: How to Implement Moderately Easing Monetary Policy?

During the National Two Sessions, Pan Gongsheng, Governor of the People’s Bank of China, attended the Fourth Session of the 14th National People’s Congress Economic Press Conference to respond to market concerns.

“Based on a review and summary of the main monetary policy work since 2025, Pan Gongsheng clarified that we will continue to adhere to a moderately loose monetary policy and will coordinate efforts in terms of policy goals, tools, and transmission mechanisms to build a scientific and prudent monetary policy system,” said Dong Ximiao, Chief Economist at Zhaolian, to the Financial Times. This addresses key issues of market concern and helps increase transparency of monetary policy, better guiding market expectations.

The tone of a moderately loose monetary policy remains unchanged, creating a suitable financial environment for high-quality real economy development

Regarding the People’s Bank of China’s monetary policy orientation in 2026, Pan Gongsheng clarified that in 2026, the central bank will earnestly implement the central government’s deployment, continue to implement a moderately loose monetary policy, and prioritize promoting stable economic growth and reasonable price increases. The bank will flexibly and efficiently use various tools such as reserve requirement ratio cuts and interest rate reductions, leveraging incremental and stock policies, and integrating monetary and fiscal policies to create a favorable financial environment for a good start to the “14th Five-Year Plan.” He explained in detail from the perspectives of quantity, interest rates, structure, and exchange rates.

In fact, China’s monetary policy has maintained a supportive stance in recent years. A review shows that since the second half of 2018, China has cut the reserve requirement ratio 18 times, continuously providing medium- and long-term liquidity to the market, which has played a role in the banking system and financial markets. Compared to the peak since the current cycle of interest rate cuts began in late 2018, policy interest rates have been lowered 10 times, totaling a reduction of 1.15 percentage points, guiding corporate loan rates and personal mortgage rates down by 2.5 and 2.7 percentage points respectively. Rough estimates suggest that with a current RMB loan balance of about 270 trillion yuan, a 2.5 percentage point reduction in interest rates could save borrowers over 6 trillion yuan annually in interest expenses.

Compared to monetary policies of developed economies’ central banks, China’s long-term stance is based on a cross-cycle perspective, with no large-scale tightening or easing, supporting the continuity and stability of the real economy. The level of personal mortgage rates in China has already approached the average levels during the zero-interest-rate periods in the US, UK, and Japan.

“Reaffirming the moderately loose stance of monetary policy again is also a reassurance to the market,” said an industry expert. The supportive monetary policy stance remains unchanged, creating a suitable environment for high-quality development of the real economy.

“Pan Gongsheng’s proposal to ‘flexibly and efficiently use various monetary policy tools such as reserve requirement ratio cuts and interest rate reductions’** indicates that RRR cuts and rate reductions are still options for monetary policy operations, but it is expected that under multiple objectives, policymakers will make ‘timely decisions’**. Going forward, adjustments will be made based on changes in economic and financial conditions and macroeconomic trends, guiding and regulating interest rates, emphasizing the quality and long-term effects of policy implementation,” explained Wen Bin, Chief Economist at China Minsheng Bank. Meanwhile, the central bank will increase the use of pledge-based and outright reverse repos, MLF, and open market operations involving government bonds, combining short-, medium-, and long-term tools to ‘smooth peaks and fill valleys,’ maintaining reasonable liquidity and stable funding rates, stabilizing markets and expectations.

Structurally, this year’s focus for structural monetary policy tools will be on supporting expanding domestic demand, technological innovation, and small and micro enterprises. “In January this year, to better promote policy effects, the central bank introduced eight structural rate cuts and other policies, linking support loans for agriculture and small businesses with re-lending and rediscounting, increasing and expanding the scope of structural monetary policy tools,” Wen Bin said. These measures aim to enhance the attractiveness of structural tools, strengthen targeted support, avoid policy resource redundancy, and improve the precision and efficiency of policy support.

Balancing the “three major relationships” to build a scientific and prudent monetary policy system

In addition to clarifying the current policy stance, Pan Gongsheng also emphasized that in the medium to long term, during the “14th Five-Year Plan” period, the People’s Bank of China will implement the deployment of the plan, build a scientific and prudent monetary policy system, and properly handle the relationships between short-term and long-term, stable growth and risk prevention, internal and external factors, advancing from the perspectives of policy goals, tools, and transmission mechanisms.

This aligns with previous statements from the central bank. As early as June 2024 at the Lujiazui Forum, Pan Gongsheng stated that “China’s monetary policy should focus on managing and balancing the relationships between short-term and long-term, stable growth and risk prevention, and internal and external factors.”

Regarding the balance of these three relationships, experts interviewed said that the main way the central bank balances short- and long-term goals is through countercyclical and cross-cycle adjustments. Additionally, the People’s Bank of China’s daily operations will reasonably weigh short- and long-term factors.

On balancing stable growth and risk prevention, industry insiders noted that past monetary policy operations have demonstrated the art of this balance. “The central bank has always considered stable growth and risk prevention comprehensively,” said an expert. They pointed out that the central bank has consistently worked to keep liquidity in the banking system ample, matching credit supply with actual demand, while avoiding excessive liquidity injections; guiding commercial banks to benefit the real economy, supporting banks in capital replenishment, and reducing their liability costs to sustain service to the real economy.

Regarding internal and external balance, it is reflected in China’s monetary policy primarily considering domestic economic and financial needs while also accounting for spillover effects from other economies’ cycles. “Monetary policy is primarily based on domestic development,” said Dong Ximiao. Despite cyclical misalignments, China’s monetary policy has withstood external pressures and supported expanding domestic effective demand. Policy adjustments are made cautiously and prudently.

As for building a scientific and prudent monetary policy system, Pan Gongsheng clarified that it will be advanced from the perspectives of policy goals, tools, and transmission mechanisms.

“The transition of the monetary policy framework from quantity-based to price-based is an important hallmark of modern monetary policy,” explained an expert to the Financial Times. As financial markets develop and the economy modernizes, the US, Europe, and Japan experienced accelerated financial disintermediation in the 1980s-90s, leading to decreased controllability, measurability, and relevance of quantity targets, gradually shifting focus from quantity to price regulation. This is also the direction of China’s monetary policy framework transformation.

In terms of transmission, Wen Bin said that based on the ongoing transformation of the monetary policy framework in the next couple of years, efforts will be made to further optimize and smooth the transmission from policy rates to market benchmark rates and various financial market rates. “Given that current lending rates are at historic lows, protecting bank interest margins remains an important goal. The statement on the overall social financing cost will shift from ‘promoting decline’ to ‘maintaining low levels.’ Future reductions in financing costs will be achieved mainly through ‘regulating credit market behavior and lowering intermediary costs,’ including expanding the scope of explicit corporate loan financing cost work in an orderly manner.”

Source: Financial Times

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