The recent economic recovery in China has displayed distinct structural characteristics, with domestic demand indicators such as consumption and investment continuing to weaken, while production, exports, and price performance have been relatively robust. The divergence in momentum between new and old industries has intensified, a phenomenon economists have termed "K-shaped divergence," making it a central topic of current market discussion.
Against this backdrop, the People's Bank of China's second-quarter 2026 monetary policy committee meeting updated its assessment of the domestic economic situation. Beyond the existing challenges of "strong supply versus weak demand" and "external shocks," it added "structural divergence," thereby upgrading the economic pressures to a three-dimensional framework. Given the differentiated financing needs and characteristics of economic transformation, how will the monetary policy adjustment approach be adapted in the second half of the year?
Central Bank Focus on Economic 'Structural Divergence'
The significant divergence in business sentiment between new and old industries has made structural contradictions a core feature of the current economic operation.
In light of this economic divergence, the assessment of the domestic economic situation by the People's Bank of China's Monetary Policy Committee for the second quarter of 2026 underwent a key adjustment. Adding "structural divergence" to the original dual challenges of "strong supply versus weak demand" and "external shocks" has upgraded economic operating pressures from two-fold to three-fold. This represents the most notable change in this meeting compared to the first quarter, drawing significant market attention.
Many market analysts believe that this iterative adjustment in official language indicates that the central bank is now focusing on the structural contradiction of the current "K-shaped divergence."
"This corresponds to the current situation where manufacturing sector sentiment is recovering while traditional industries like infrastructure and real estate are bottoming out," said Ming Ming, Chief Economist at CITIC Securities.
Liao Bo, Chief Macroeconomic Analyst at Northeast Securities, believes that the current "K-shaped divergence" in China's economy is mainly manifested as supply being stronger than demand, external demand outperforming domestic demand, and the new economy exhibiting higher business sentiment than the old economy. Domestic economic operations may exhibit non-linear growth characteristics amid rising internal and external uncertainties, with supply and demand potentially showing a K-shaped divergence trend.
Xiong Yuan, Chief Economist at Guosheng Securities, previously pointed out that China is at an "inflection point year" in the transition between old and new growth drivers. This means that the new economy, represented by AI and high-end manufacturing, will increasingly become the main incremental contributor to China's economy, while the contribution from the old economy, represented by real estate and traditional infrastructure, will tend to stabilize, with its share continuing to decline gradually. The divergence essentially reflects an inevitable stage and outcome of China's economic transition between old and new growth drivers.
The pattern of macroeconomic "K-shaped divergence" implies that counter-cyclical and cross-cyclical policy support will still be needed in the second half of the year. A Galaxy Securities research report noted that macro policies in the second half of the year are expected to pay more attention to the series of impacts brought by "structural divergence" during the transition between old and new growth drivers, implementing more proactive counter-cyclical policies to cushion the downside risks during the economic structural transformation.
Structural Policy Implementation
As "structural divergence" becomes the core contradiction in current domestic economic operations, the subsequent direction of macro policy efforts and the pace of monetary regulation are attracting significant attention. In the process of supporting the economy, how can policies effectively boost consumption, stabilize traditionally weak sectors, while also preventing issues of idle capital and resource misallocation in stronger sectors?
In this context, the application weight of structural and targeted policy tools is expected to continue increasing.
Liao Bo anticipates that structural policy tools will continue to exert force, simultaneously strengthening the structural guidance of credit, with key support areas including expanding domestic demand, technological innovation, and small and medium-sized enterprises. Attention should be paid to new types of policy-based financial instruments playing a "quasi-fiscal" function. In the medium to long term, the gradual slowdown in credit growth corresponds to the economic structural transformation and upgrading, leading to a "gear shift" in credit demand and a benign substitution by direct financing. The future will likely feature a new characteristic of "government increasing leverage, enterprises stabilizing leverage, and residents appropriately deleveraging." Structurally, the focus will be on supporting areas related to the "Five Major Articles," and future reasonable evaluation of financial support intensity may pay more attention to the effectiveness of interest rate reductions, as well as the strength of financial support for key areas like technological innovation, green development, and small and medium-sized enterprises.
In the second-quarter monetary policy committee meeting, the language on monetary policy showed little difference from the first quarter. The phrase "comprehensively using various tools" was removed, placing greater emphasis on the "forward-looking, flexible, and targeted" nature of monetary policy.
Dong Ximiao, Chief Economist at Zhaolian, believes this move highlights a tactical upgrade of monetary policy from broad-based easing to precise regulation. Ming Ming suggests that "forward-looking" means monetary tool operations will precede the real economy and capital markets, "flexible" means operations will be timely in both advancing and retreating, and "targeted" means the central bank will continue to increase its focus on structurally supported areas in the next phase.
"To fundamentally reverse the long-term policy of K-shaped divergence, it is essential to rely on institutional reforms and technological innovation to significantly enhance total factor productivity. This requires coordinated efforts between central and local governments and close cooperation between fiscal and monetary policies, which is not an overnight task," Ming Ming emphasized. Within the classic macro-control framework, the central bank's monetary policy and the Ministry of Finance's expansionary fiscal policy are conventional tools for addressing demand contraction. However, purely broad-based easing can no longer directly stimulate the willingness of the private sector to increase leverage; it also requires precise structural guidance and fiscal-financial coordination.
Broad-Based Easing May Be Prudent
The persistence of the economic "K-shaped divergence" pattern also presents new trade-offs for macro-control and monetary policy choices. From the perspective of financing demand, the new economy sectors, which are on an upward trajectory, exhibit relatively weak monetary and credit demand, while the traditional, persistently pressured weak sectors have stronger financing demands. This differentiated demand for funds further complicates the precise regulation of monetary policy. In the next stage, how much room is there for broad-based monetary policies?
Zhang Yu, Chief Economist at Huachuang Securities, believes that subsequent "weakness" in loans may not necessarily trigger monetary policy "easing" from the central bank. The strength or weakness of credit more reflects the terminal demand related to traditional real estate and infrastructure. The new economy, moving towards innovation and quality, is more compatible with direct financing, and the economic recovery it drives does not necessarily accompany high credit growth. Therefore, the strength or weakness of credit does not necessarily correspond to the strength or weakness of the overall economy.
Liao Bo believes that the slow repair of private sector balance sheets constrains endogenous momentum. Monetary policy will maintain a moderately accommodative stance, and it is expected there is still probability of further reserve requirement ratio cuts to promote broad-based credit and improve corporate access to funds. While maintaining a moderately accommodative tone, the central bank will also simultaneously emphasize preventing idle capital and guiding funds into the real economy, thereby enhancing the efficiency of growth stabilization.
Considering that neither the first-quarter monetary policy execution report nor the second-quarter monetary policy committee meeting mentioned policy language regarding RRR or interest rate cuts, Zhang Yu believes the probability of such moves is currently relatively low. Against the backdrop of weak credit, the expansion rate of required reserve deposits is limited, and the banking system's new demand for base liquidity is not strong, reducing the necessity for RRR cuts. From the perspective of interest rate cuts, against the backdrop of the economy moving towards innovation and quality, the urgency for rate cuts may also not be high. However, it is worth noting that, given the need for financial market stability, if the capital market experiences significant shocks, the probability of interest rate cuts may increase, and liquidity support tools for non-bank financial institutions, among others, may also be accelerated or expanded to mitigate the transmission of asset price volatility to the financial system and real economy expectations.
Ming Ming stated that for China's economy to break the deadlock of K-shaped divergence, it must rely on institutional reforms and technological innovation to enhance total factor productivity. Regarding institutional reforms, it is necessary to deepen fiscal and tax system reforms, advance the shift of the consumption tax collection point downstream and allocate it to local governments, breaking the constraints of the production location principle; and increase the share of labor compensation in primary distribution. Regarding technological innovation, AI will become the core engine driving the improvement of total factor productivity. Through the widespread adoption of technological dividends and the improvement of distribution mechanisms, it can drive the reshaping of the consumption landscape.