How can efforts be focused on boosting consumption and stabilizing traditionally weak sectors, while also preventing issues like idle capital and resource misallocation in stronger sectors?
Recently, China's economic recovery has exhibited distinct structural characteristics. Domestic demand indicators such as consumption and investment continue to weaken, while performance in production, exports, and pricing has been relatively robust. The divergence in momentum between old and new industries has intensified. Economists describe this structural feature of the current recovery as "K-shaped divergence," making it a central topic of 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 economy. Beyond the previous challenges of "strong supply versus weak demand" and "external shocks," it added a new judgment of "structural divergence," upgrading the economic pressures to three dimensions. Faced with differentiated financing needs and the characteristics of economic transformation, how will the monetary policy adjustment approach evolve in the latter half of the year?
Central Bank Focuses on Economic "Structural Divergence"
The significant divergence in business sentiment between old and new industries highlights structural contradictions as a core feature of the current economic operation.
In light of this economic divergence, the assessment of the domestic economic situation at the PBOC's second-quarter monetary policy committee meeting underwent a key adjustment. Beyond the two existing challenges of "strong supply versus weak demand" and "external shocks," a third challenge—"structural divergence"—was added. This upgrade of economic operating pressures from dual to triple dimensions represents the most market-notable change from the first-quarter meeting.
Many market analysts believe this iterative adjustment in the official language indicates the central bank is now giving significant attention to the structural contradiction of the current "K-shaped divergence" in the economy.
"This corresponds to the current situation of manufacturing sector sentiment recovering while traditional industries like infrastructure and property are bottoming out," said Ming Ming, Chief Economist at CITIC Securities.
Liao Bo, Chief Macroeconomic Analyst at Northeast Securities, believes the current "K-shaped divergence" in China's economy is mainly manifested in supply being stronger than demand, external demand outperforming domestic demand, and the business climate of the new economy being higher than that of the old economy. Amid rising internal and external uncertainties, domestic economic operations may exhibit non-linear growth characteristics, with supply and demand potentially showing a K-shaped divergence trajectory.
Xiong Yuan, Chief Economist at Guosheng Securities, previously pointed out that China is at an "inflection point year" for the transition between old and new growth drivers. That is, the new economy, represented by AI and high-end manufacturing, will increasingly become the main incremental contributor to China's economy. Meanwhile, the contribution of the old economy, represented by real estate and traditional infrastructure, will tend to stabilize, with its share continuing to decline gradually. The divergence essentially represents 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 support from counter-cyclical and cross-cyclical policies will still be needed in the second half of the year. A Galaxy Securities research report notes that macro policies in the latter half of the year are expected to pay greater attention to the series of impacts brought by "structural divergence" during the transition of old and new drivers. More proactive counter-cyclical policies are likely to be implemented to cushion downside risks during the economic structural transformation.
Policy to Exert Force in a Structural Manner
With "structural divergence" becoming the core contradiction in current domestic economic operations, the subsequent direction of macro policy efforts and the pace of monetary regulation are under close scrutiny. How can policies, while supporting the economy, focus on boosting consumption and stabilizing traditionally weak sectors, while simultaneously preventing issues like 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. Key support directions include expanding domestic demand, technological innovation, and small and medium-sized enterprises. Attention should be paid to new-type policy financial instruments playing a "quasi-fiscal" function. In the medium to long term, the gradual slowdown in credit growth corresponds to the "gear-shift" in credit demand and the benign substitution by direct financing driven by economic structural transformation and upgrading. Future trends will likely feature "government increasing leverage, enterprises stabilizing leverage, and residents appropriately reducing leverage." Structurally, support will focus on areas related to the "Five Major Articles." In the future, reasonably evaluating the strength of financial support could focus more on the effectiveness of interest rate reductions and the intensity of financial support for key areas like technological innovation, green development, and SMEs.
In the second-quarter monetary policy committee meeting statement, the monetary policy wording did not differ significantly 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 easing to precise regulation. Ming Ming suggests that "forward-looking" means monetary tool operations will lead 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 sectors in the next phase.
"To fundamentally reverse the K-shaped divergence in the long term, we must rely on institutional reforms and technological innovation to significantly enhance total factor productivity. This requires coordinated efforts between central and local governments and close coordination 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 to address demand contraction. However, simple broad easing can no longer directly stimulate the willingness of the private sector to increase leverage; it also requires precise structural measures and fiscal-financial coordination.
Broad Easing May Be Approached Cautiously
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 economic sectors that are trending upward have relatively weak monetary and credit demand, while the traditional, persistently pressured weak sectors have stronger financing demands. This differentiated capital need further complicates the precise regulation of monetary policy. In the next phase, how much room remains for broad monetary policy?
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, which is moving towards innovation and excellence, is more compatible with direct financing. The economic repair it drives does not necessarily accompany high credit growth; therefore, credit strength or weakness does not necessarily correspond to the strength or weakness of the overall economy.
Liao Bo argues that the slow repair of private sector balance sheets constrains endogenous momentum. Monetary policy will maintain a moderately accommodative stance, and subsequent reserve requirement ratio (RRR) cuts are still expected to promote broad credit and improve corporate access to funds. While maintaining a moderately accommodative stance, the central bank will also emphasize preventing idle capital and guiding funds into the real economy to enhance the efficiency of stabilizing growth.
Considering that neither the first-quarter monetary policy execution report nor the second-quarter monetary policy committee meeting statement mentioned policy wording 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 excellence, the urgency for rate cuts may also not be high. However, it is noteworthy that under the demand for financial market stability, if the capital market experiences significant shocks, the probability of interest rate cuts would increase. Liquidity support tools for non-bank financial institutions might also be expedited 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 link and delegate it to local governments, break the constraints of the production location principle, and increase the share of labor remuneration 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.