The People's Bank of China (PBOC) released its second-quarter monetary policy execution report for 2026 on August 12, detailing the main policy approaches for the upcoming period. The report uses special columns to elaborate on the progress of refining the short-term interest rate control mechanism and emphasizes the need for a comprehensive understanding of the strength and effectiveness of financial support for the real economy. This marks a shift from a previously narrow focus on loan volume to a more objective and diversified composite perspective. Additionally, the report examines the monetary policy adjustments of major overseas economies, predicting that this round of changes will be relatively moderate.
Enhancing the Foresight, Flexibility, and Targeting of Monetary Policy
In its outlook for the next phase of monetary policy, the report calls for maintaining reasonable total financial growth. It advocates continuing the implementation of a moderately accommodative monetary policy and leveraging the combined effects of both incremental and existing policies. The report stresses the need to enhance the foresight, flexibility, and targeting of monetary policy, treating the promotion of stable economic growth and a reasonable recovery in prices as key considerations. It emphasizes calibrating the intensity, pace, and timing of policy implementation based on domestic and international economic and financial conditions and financial market operations, to continuously foster a suitable monetary and financial environment. The report also highlights the importance of closely monitoring monetary policy changes in major overseas central banks, strengthening analysis of the banking system's liquidity demand and supply and money market fluctuations, and comprehensively using and timely adjusting monetary policy tools to maintain ample liquidity. This will better guide short-term money market interest rates to operate smoothly around the policy rate, ensuring stable financial support for the real economy. The growth of aggregate social financing and money supply should align with the expected targets for economic growth and the general price level.
Industry experts note that in the first half of the year, heightened global geopolitical conflicts and increased external uncertainties led China to adopt more proactive and effective macroeconomic policies. These policies intensified counter-cyclical adjustments, boosted domestic demand, optimized supply, and kept key economic indicators stable, effectively countering external risks and challenges. This demonstrates China's institutional and large-country advantages. In the second half of the year, government bond issuance is expected to accelerate, with ongoing projects in major national construction, urban renewal, and new energy systems. The synergistic effect of macroeconomic policies is anticipated to further materialize, leading to a steady release of demand.
Price Levels Expected to Maintain a Reasonable Recovery Trend
From January to July 2026, the cumulative year-on-year increase in the CPI was 0.9%, maintaining a generally mild upward trend. In July, the year-on-year CPI growth slowed to 0.5%, while the core CPI, excluding food and energy, rose by 0.9% year-on-year. On the producer price front, the July PPI increased by 3.5% year-on-year, marking five consecutive months of positive growth. The report states that looking ahead, while external uncertainties and unpredictable factors are numerous, and international commodity price trends are uncertain, China's policy system for ensuring supply and stabilizing prices is robust and effective. Supply of essential consumer goods is ample, energy import channels are diversified with sufficient reserves, and the resilience of the industrial and supply chains continues to improve. These factors provide favorable conditions for maintaining stable prices, with the price level expected to maintain a reasonable recovery trend.
Industry experts suggest that the ongoing game between the US and Iran over the Strait of Hormuz's openness creates significant uncertainty in international commodity prices, requiring continuous monitoring of imported inflationary pressures. However, China's strong capacity for price stabilization and supply assurance, coupled with its comprehensive policy and institutional framework, diversified energy import channels in recent years, and ample energy reserves, provide many favorable conditions for maintaining stable prices. Consequently, the price level is expected to continue its reasonable recovery.
Continuing to Steadily and Orderly Promote the Reform and Improvement of the Monetary Policy Operational Framework
In the latest report, the PBOC dedicated a column to introducing international experiences in short-term interest rate control and the progress of China's reforms and improvements to its short-term rate control mechanism in recent years. The column notes that the PBOC's interest rate control mechanism has evolved alongside domestic interest rate marketization reforms. Looking ahead, the central bank will continue to steadily and orderly advance the reform and improvement of its monetary policy operational framework. This includes conducting various operations flexibly and accurately, maintaining total liquidity at an appropriate level, and better guiding the smooth operation of short-term money market rates. The bank will also gradually increase the frequency of overnight reverse repo operations based on the needs of primary dealers, further smoothing the transmission of policy rates to market rates.
Industry experts point out that the pace of reforming and improving the short-term interest rate control framework has accelerated significantly in recent years, in line with the transformation of China's monetary policy control framework and a greater emphasis on price-based regulation. Recent measures include clarifying the 7-day reverse repo rate as the primary policy rate, shifting the target rate towards the overnight money market rate, adding reverse repo tools of different maturities, and introducing temporary overnight repo/reverse repo facilities with an interest rate corridor. At the Lujiazui Forum in June of this year, further policy measures were announced to optimize the use of temporary repo/reverse repo tools and add overnight reverse repo operation varieties. These steps are expected to enhance the precision and effectiveness of the central bank's liquidity management and short-term rate control, and have received positive market feedback. In the past two years, the overnight money market rate (DR001) has consistently operated within the temporary repo/reverse repo rate corridor. The central bank will continue to refine its monetary policy operational framework, maintain ample liquidity, and ensure the smooth operation of short-term money market rates, further unblocking the transmission of policy rates to market rates.
Downplaying the Focus on Loans as a Single Financing Channel
In a column titled "Comprehensively Grasping the Strength and Effectiveness of Financial Support for the Real Economy," the PBOC proposes shifting from the previously singular perspective of loan volume to a more objective and diversified composite perspective to accurately understand current monetary and financial conditions. The report points out that the aggregate social financing (ASF) and M2 indicators, which cover different angles—finance vs. entity and assets vs. liabilities—and encompass a wide variety of financing channels, are relatively comprehensive aggregate financial indicators. Their trends should also be viewed objectively and scientifically. The report also calls for downplaying the focus on loans as a single financing channel and instead combining loans and bond financing for observation. The PBOC states that financial support for the real economy has transitioned from focusing more on scale expansion to focusing more on quality and efficiency. Financing channels have become more diverse, resource allocation is more optimized, and financial adaptability is continuously improving. Against this backdrop, observing the strength and quality of financial support for the real economy should no longer be confined to a single channel (loans), a single scale, or a single growth rate perspective. Instead, a more multidimensional and comprehensive approach is needed to scientifically analyze the full-spectrum support the financial system provides for high-quality development.
Expecting Monetary Policy Adjustments by Major Economies' Central Banks to Be Relatively Moderate
In the latest report, the PBOC also uses a column to focus on the monetary policy adjustment movements of major overseas economies. As of the end of July, among major developed economy central banks, the European Central Bank and the Bank of Japan have taken rate hike actions, while the Federal Reserve maintained its rate but released hawkish signals. The report predicts that the monetary policy adjustments by major economies' central banks in this round will be relatively moderate. First, the intensity of the current energy shock is tending to ease, meaning the magnitude of rate hikes needed is not excessive. Second, this round of monetary policy adjustment is not a "sharp reversal" of macro policy. Before this round of adjustments, monetary policy in major overseas economies was still somewhat restrictive, so the current rate hikes primarily represent a change in rates and liquidity, not a reversal of the policy stance. The report also warns of uncertainties regarding the impact of these rate hikes on global financial markets. Emerging market economies, in particular, need to be mindful of the spillover effects from rate hikes in major economies. Those with fragile economic fundamentals or high dependence on energy imports must closely monitor the risks of global financial market volatility that could arise from the monetary policy shift of major central banks.
Industry experts note that as a large economy, China's monetary policy has long been conducted with a focus on domestic priorities while balancing internal and external considerations. In recent years, the PBOC has implemented a moderately accommodative monetary policy primarily to create a suitable monetary and financial environment for the stable operation of the domestic economy and high-quality development. However, it is important to recognize that policy adjustments by major central banks often have spillover effects on global financial markets. As China is deeply integrated into globalization and is accelerating the construction of a dual-circulation development pattern, it must also closely monitor the uncertainties surrounding policy adjustments by major central banks, calibrating the intensity, pace, and timing of its own monetary policy according to domestic and international economic and financial conditions.
Interbank Market Data Repository Breaks Down Data Silos
In June, the Interbank Market Data Repository (Shanghai) Co., Ltd. officially commenced operations in Shanghai. The PBOC introduced the background and policy objectives of this data repository in a special column. The column explains that for a long time, transaction and settlement data for various varieties in the interbank market, including currency, bonds, bills, and gold, were dispersed across different market infrastructures. This hindered a comprehensive understanding of the overall market operations and the complete picture of institutional behavior. Therefore, it was necessary to establish a specialized institution to comprehensively collect, store, analyze, and manage data information from the interbank market, breaking down data silos, strengthening market monitoring and regulation, and dynamically tracking the behavior of financial institutions. Industry experts suggest that by frequently aggregating and systematically analyzing transaction data from various sub-markets in the interbank market, the data repository provides strong support for the stable and healthy operation of the market. For macro-control authorities, it offers a decision-making basis for comprehensively assessing the effectiveness of monetary policy transmission, enhancing the effectiveness of macro-prudential management. For market regulators, it helps avoid regulatory blind spots caused by data fragmentation, effectively combating illegal and non-compliant market activities. For market participants, it helps reduce information asymmetry, preventing blind following and excessive speculation caused by herd behavior. Furthermore, by referencing international standards and practices, the data repository can help domestic and foreign institutions better familiarize themselves with the market, supporting the high-level opening up of the financial markets.