The People’s Bank of China (PBOC) released the China Monetary Policy Implementation Report for the Second Quarter of 2026 on August 12. The report analyzes domestic and external economic conditions, clarifies the primary thinking for monetary policy in the next stage, and discusses hot topics including monetary policy adjustments by major overseas economies and interest rate regulation mechanisms.

The report makes it clear that in the next phase, the PBOC will fully leverage the effectiveness of existing policies and promptly plan and roll out practical and effective incremental policies. It also puts forward specific proposals: advancing the diversification of loan pricing benchmarks and guiding financial institutions to strengthen their interest rate pricing capacity; and gradually increasing the frequency of overnight reverse repo operations in response to demands from primary dealers.

Guiding Financial Institutions to Boost Interest Rate Pricing Capacity

Regarding monetary policy for the period ahead, the report calls for continued implementation of a moderately accommodative monetary policy. Authorities will enhance the forward-looking nature, flexibility and targeting of policies. In light of domestic and international economic and financial conditions as well as financial market performance, policymakers will properly calibrate the intensity, pace and timing of policy implementation, strengthen coordination with fiscal policies, and support steady economic growth, high-quality development and stable operation of financial markets.

The report states that monetary policy instruments will be employed comprehensively and adjusted in a timely manner to maintain ample liquidity and relatively accommodative social financing conditions. Growth in aggregate social financing and money supply will be kept consistent with the expected targets for economic expansion and overall price levels.

On interest rates, the report specifies that reform and improvement of the monetary policy operational framework will be pushed forward in a steady and orderly manner to better guide short-term money market interest rates to fluctuate smoothly around policy rates. Authorities will give play to the role of the self-regulatory mechanism for market interest rate pricing, and strengthen enforcement and oversight of interest rate policies. Efforts will be made to diversify loan pricing benchmarks and guide financial institutions to lift their interest rate pricing capabilities. Continuous work will be carried out to make the comprehensive financing costs of corporate loans transparent, cut intermediate financing fees, and keep overall social financing costs at a low level.

On exchange rates, the report stresses adherence to a managed floating exchange rate regime based on market supply and demand, with reference to a basket of currencies, and maintenance of exchange rate flexibility. The exchange rate will function as an automatic stabilizer regulating the macroeconomy and balance of payments. A mix of policies will be adopted to bolster resilience in the foreign exchange market, stabilize market expectations, guard against the risk of excessive exchange rate swings, and keep the RMB exchange rate basically stable at an adaptive and equilibrium level.

The report also notes that monetary policy instruments should fulfill both aggregate and structural functions. A suite of monetary and financial policies unveiled earlier this year will be fully implemented. The design and administration of policy tools will be continuously refined. Solid progress will be made in advancing the five key priorities of financial work, with strengthened financial support for key areas including domestic demand expansion, technological innovation, and micro, small and medium-sized enterprises (MSMEs).

When assessing China’s macroeconomic and financial landscape, the report holds that the fundamental trend of stable economic performance toward new growth drivers and higher quality remains unchanged, yet the foundation for steady improvement needs further consolidation.

Industry experts commented that heightened uncertainties clouded the external environment in the first half of the year. Against this backdrop, China’s macro policies adopted a more proactive stance. Major economic indicators stayed stable, enabling effective responses to external risks and challenges. Looking ahead, accelerated issuance of government bonds, continued advancement of major strategic investment projects, urban renewal and development of new energy systems will amplify the effects of coordinated macro policies, and demand is expected to recover steadily.

The report projects that China’s prices will maintain reasonable growth. This judgment is underpinned by a robust system of policies ensuring supply stability and price controls, sufficient supplies of key consumer goods, diversified energy import channels and ample reserves, as well as continuously improved resilience of industrial and supply chains. Favorable conditions are in place to sustain stable prices.

Monetary Policy Adjustments by Major Economies to Be Relatively Moderate

Since the start of this year, tensions in the Middle East have at one point pushed up international crude oil and commodity prices, driving broad-based rises in inflation across major economies. A special column in the report points out that recent monetary policy shifts or emerging adjustment trends among central banks of major overseas economies such as the US Federal Reserve and European Central Bank (ECB) may generate spillover effects on the global economy and financial markets.

As of the end of July, among central banks of major advanced economies, the ECB and Bank of Japan have raised interest rates, while the Federal Reserve kept rates unchanged but sent hawkish signals.

On monetary policy adjustments by major overseas economies, industry experts noted that as a large economy, China has long pursued a monetary policy that prioritizes domestic conditions while balancing internal and external equilibria. In recent years, the PBOC has implemented a moderately accommodative monetary policy mainly to foster a suitable monetary and financial environment for stable domestic economic performance and high-quality development.

“Nevertheless, it should be recognized that shifts in monetary policy stances of major central banks tend to exert certain spillover impacts on global financial markets. China is deeply integrated into globalization and accelerating the development of a domestic and international dual circulation development pattern. We must closely track uncertainties surrounding policy adjustments by major overseas central banks, and properly calibrate the intensity, pace and timing of monetary policy implementation in response to domestic and international economic and financial conditions and financial market movements,” the experts added.

The report forecasts that monetary policy adjustments by major economy central banks in this cycle will be relatively moderate. Industry experts explained that, on the one hand, the current round of energy shocks is easing, meaning advanced economy central banks will not need large rate hikes even if tightening is required. On the other hand, prior to the latest round of policy adjustments, overseas major central banks faced multiple constraints. Recent rate increases mainly bring changes to interest rates and liquidity rather than drastic reversals of macro policies.

The report warns of uncertainties regarding the impact of the latest round of rate hikes on global financial markets. In bond markets, elevated government debt levels in some economies mean higher interest rates could further strain debt servicing burdens. In equity markets, high valuations in some jurisdictions risk market corrections amid liquidity tightening.

Gradually Increase the Frequency of Overnight Reverse Repo Operations

Regulating short-term money market interest rates is a common monetary policy practice adopted by central banks worldwide. A special column in the report observes that central banks of advanced economies target short-term money market interest rates, most commonly overnight rates with the shortest maturity.

“Nonetheless, subtle differences exist among central banks in their choice of policy rates and regulation approaches,” industry experts said. For instance, the Federal Reserve uses the effective federal funds rate, a benchmark money market rate, as its policy and target rate. The ECB takes the overnight deposit facility (DF) rate as its primary policy rate, while its implicit target rate remains the market overnight rate.

Since 2024, China has markedly accelerated reforms to refine its short-term interest rate regulation framework: the seven-day reverse repo rate has been defined as the key policy rate; the policy rate attribute of instruments including the Medium-term Lending Facility (MLF) has been de-emphasized; and the target regulation rate is gradually shifting toward the money market overnight rate. Since June this year, the PBOC has optimized the operational mechanism for ad hoc term repos and reverse repos, and introduced overnight reverse repo operations in a timely manner.

Industry experts said these measures help further improve the accuracy and effectiveness of liquidity management and short-term interest rate regulation, and have garnered positive market responses.

Going forward, the PBOC will steadily push forward reforms to improve the monetary policy operational framework. It will conduct flexible and precise open market operations to keep overall liquidity at an appropriate level and better guide stable movements of short-term money market interest rates. In response to demands from primary dealers, the central bank will gradually raise the frequency of overnight reverse repo operations to further smooth the transmission from policy rates to market rates.

Source: Shanghai Securities News