To The Moon

The People's Bank of China held a working conference for the second half of 2026, reviewing progress since the start of the year, analyzing the current economic landscape, and outlining plans for the next phase. The meeting stressed the need to implement a moderately accommodative monetary policy, fully leverage the effectiveness of existing policies, and promptly introduce practical and targeted new measures. The focus is on strengthening counter-cyclical adjustments, boosting domestic demand, and optimizing supply to drive the economy toward continuous innovation, improved quality, and robust growth.

Multiple experts anticipate that there is both room and possibility for reserve requirement ratio (RRR) cuts and interest rate reductions within the year. Dong Ximiao, Chief Economist at Merchants Union Consumer Finance, noted that signals from the meeting indicate a significant intensification of counter-cyclical adjustments. He expects enhanced policy support for growth in the second half of the year, with faster implementation of existing measures and timely introduction of new ones. "Currently, both RRR cuts and interest rate reductions are possible," Dong said, adding that the likelihood and scope for RRR cuts appear greater than those for rate cuts. If the People's Bank of China reduces RRR to lower bank funding costs and adjusts policy rates, the Loan Prime Rate (LPR) could potentially decline. However, with banks' net interest margins at historic lows, the room for LPR reduction is limited, likely ranging from 5 to 10 basis points.

Luo Zhiheng, Chief Economist at Yuekai Securities, views RRR cuts and rate reductions as "reserve tools" subject to "discretionary timing." He further suggests that structural monetary policy instruments may see increased volume and lower costs, with potential directions including expanding the application scenarios for service consumption and elderly care relending, as well as agricultural and small-business relending. Additionally, new or revived policy financial instruments could be created for major projects, and existing relending tools could be optimized for new productive forces such as artificial intelligence, commercial aerospace, and low-altitude economy.

The meeting also reiterated the goal of maintaining ample liquidity. This year, the People's Bank of China has employed a mix of monetary policy tools, including reverse repos, medium-term lending facilities, and government bond transactions, to provide short-, medium-, and long-term liquidity. Wang Qing, Chief Macro Analyst at Dongfang Jincheng, observed that after earlier adjustments to open market operations, key market rates like the DR001 (overnight deposit facility rate) have returned to near policy rates, with net liquidity injection resuming in July. He expects the central bank to continue using various liquidity management tools to keep funding ample, making it unlikely for DR001 to significantly deviate from policy rates. Notably, the People's Bank of China has established an overnight reverse repo tool and is increasing its operational frequency. Wang believes this will further curb DR001 volatility, creating favorable conditions for transitioning the monetary policy framework to a price-based system.

Since the start of the year, the central bank has strengthened the enforcement and supervision of interest rate policies, urging financial institutions to disclose comprehensive loan financing costs clearly and maintain low social financing costs. According to central bank data, in June, the weighted average interest rate on new corporate loans was around 3%, down about 0.2 percentage points year-on-year. The rate for new inclusive small and micro loans was 3.57%, a decrease of 0.16 percentage points from the previous year. New personal housing loan rates in June were about 3.1%, roughly flat year-on-year, while the stock of personal housing loans at the end of June saw a year-on-year decline of 0.13 percentage points. For the next phase, the meeting emphasized regulating credit market practices, reducing intermediary financing costs, and maintaining low overall social financing costs. It also called for continued efforts in interest rate policy implementation and supervision. Wang Qing believes that after notable progress in requiring transparency for corporate loan costs, the next focus will be on disclosing comprehensive costs for personal loan businesses, prohibiting hidden fees such as itemized charges, cost transfers, and off-balance-sheet fees. This approach aims to protect financial consumers' rights to information and fair dealing while encouraging rational borrowing and preventing excessive debt due to underestimated repayment pressures.