China's central bank more talk than action on monetary policy
Top Chinese economists expect only moderate rate cuts this year despite Beijing's bold language.
Prominent Chinese economists expect the central bank to show further restraint on the monetary policy front in 2026, despite Beijing’s use of bold language to signal major loosening since the end of 2024.
They expect only modest cuts to both the policy interest rate and the required reserve ratio this year, as households and businesses remain reluctant to borrow and spend, and fiscal policy does most of the heavy lifting needed to keep China’s economy on a sound footing.
Central bank holds key 2026 meeting
The Chinese central bank just held its inaugural work meeting for the year from 5 - 6 January, sending key signals as to the direction of monetary policy in 2026.
The meeting’s headline statement was that it would “continue the implementation of moderately loose monetary policy in 2026,” as part of Beijing’s broader macroeconomic stimulus drive.
The central bank also said that it would “maintain ample liquidity and relatively loose social financing conditions,” with a view to “guiding rational growth in aggregate financing.”
Beijing shifted its official monetary policy setting to “moderately loose” at the end of 2024.
The move was interpreted at the time as a sign of major loosening, given the phrase was last employed in the aftermath of the Global Financial Crisis, during Wen Jiabao’s implementation of a mammoth four trillion yuan stimulus plan.
In 2025, however, the Chinese central bank dialled back on interest rate and reserve ratio cuts, despite the treacherous waters created by Trump’s tariff war and worsening trade relations with the US.
Last year, the central bank implemented only a single reduction to its main policy rate - the seven-day reverse repo rate, with a cut of just 10 basis points in May.
This stands in contrast to two cuts applied to the policy rate in 2024, bringing it down by a total of 30 basis points.
The Chinese central bank was also highly restrained in its use of reductions to the required reserve ratio.
The reserve ratio refers to the volume of deposits that commercial lenders are required to stow with the central bank, constraining their ability to create new loans.
In 2025, the central bank reduced the required reserve ratio on just a single occasion, with a 50 basis point cut that coincided with the adjustment to the policy rate made in May
This reduction also fell short of the central bank’s loosening measures in 2024, which saw two cuts to the reserve ratio that collectively brought it down by 100 basis points.
Interest rate restraint anticipated in 2026
In the wake of the central bank’s latest work meeting, leading Chinese economists now expect it to show further restraint on key aspects of monetary policy this year, at odds with the official stance of “moderate loosening.”
Wang Qing (王青), chief macro-economist at Golden Credit Rating, forecasts that the Chinese central bank will cut interest rates twice in 2026, bringing them down by 20 - 30 basis points.
Li Xunlei (李迅雷), chief economist at Zhongtai Securities, is even more conservative, expecting a reduction of just 10 - 20 basis points.
This means the Chinese central bank’s interest rate cuts in 2026 could fall short of the 30 basis point reduction in 2024 - before Beijing decided to make the bold move of shifting its official monetary policy setting to “moderately loose,” and prior to the start of Trump’s second term in office.
With regard to the required reserve ratio, Wang Qing expects the central bank to make at least one or two cuts, bringing it down by 50 - 100 basis points, while Li forecasts a full year reduction in the required reserve ratio of 25 - 50 basis points.
Once again, the central bank could also fall short of its loosening measures in 2024, when it reduced the required reserve ratio by 100 basis points.
Why all the restraint?
China’s top policymakers and economists have long contended that the biggest challenge facing the national economy is insufficient domestic demand.
Many impute this issue to the damage to balance sheets caused by China’s property slump and the economic disruptions of the Covid pandemic.
The decline in home prices has made Chinese households and businesses more inclined to pay off their debts, as opposed to piling them higher.
As a consequence, unwarranted cuts to interest rates may do little to raise their propensity to borrow and spend. This was evidenced by ailing growth in renminbi lending towards the end of last year.
Rate cuts could also deprive the central bank of policy ammunition it may want ready at hand in future, should the challenges that beset the Chinese economy further intensify.
Copious fiscal spending is Beijing’s other macroeconomic option for keeping China’s economy afloat in the face of uncertainty.
In order to support such spending, the Chinese central bank stepped up liquidity injections last year, while simultaneously showing restraint on interest rates.
It achieved this via a range of other instruments that are part and parcel of its monetary policy toolkit, serving to complement adjustments to the policy rate and the reserve ratio.
The Chinese central bank made net injections of 591.6 billion yuan during the period from January to November last year, via open market operations that included the medium-term lending facility (MLF), the standing lending facility (SLF) and pledged supplementary lending (PSL).
This marked a stark reversal from net withdrawals of 3.09 trillion yuan for the same period in 2024.
Wang Qing expects such injections to continue in 2026, with the central bank making greater use of MLFs as well as outright reserve repos to inject medium-term liquidity, in tandem with open market purchases of Chinese treasuries to inject long-term liquidity.
“At present [the central bank] has a rich variety of quantitative policy tools, and is not constrained by the limitations on required reserve cuts,” he said to Securities Daily.
“This will maintain ample market liquidity, ensure that the government can issue bonds effectively, and guide financial institutions to expand the intensity of lending.
“This too is a key point of effort for strengthening counter-cyclical adjustments.”