PBOC vows readiness on policy tools

With China's central bank having signaled readiness to flexibly implement cuts to the reserve requirement ratio and interest rates, analysts pointed to the rising necessity and possibility of front loading monetary easing measures this year to kick off a solid economic start for the 15th Five-Year Plan period (2026-30).

They commented as the People's Bank of China, the country's central bank, vowed to flexibly and efficiently deploy a range of monetary policy tools — including cutting the RRR and interest rates — to keep liquidity ample and guide reasonable growth in overall financial aggregates at its annual work meeting which concluded on Tuesday.

The RRR refers to the proportion of deposits that banks must hold as reserves.

The wording marks a more proactive tone from the central bank's monetary policy meeting last month, which pledged "strengthening counter-cyclical and cross-cycle adjustments" yet skipped any hints on major measures such as cutting the RRR or interest rates.

"We will take promoting high-quality economic development and achieving a reasonable recovery in prices as important considerations for monetary policy," the central bank said in the annual work meeting statement as it outlined its plans for moderately accommodative monetary policy in 2026.

The one-year central government bond yield dropped to 1.315 percent on Friday, compared with more than 1.34 percent before the meeting, according to the National Interbank Funding Center.

Analysts said this signaled that China's bond market is pricing in future easing measures, which could be deployed early this year as liquidity support is needed to accommodate government bond issuances.

Meanwhile, a high comparison base — with China's economic growth coming in at a relatively strong 5.4 percent in the first quarter of 2025 — reinforces the case for ramping up macroeconomic support to maintain stable growth momentum early this year, they said.

Zhang Jun, chief economist at China Galaxy Securities, said the path for monetary easing in the first quarter is likely to combine an RRR cut with targeted interest rate reductions. China last cut the RRR in May last year, sending the average RRR to 6.2 percent for financial institutions.

"With fiscal support front-loaded and monetary policy coordinating, an RRR cut is likely to be implemented, lowering banks' funding costs and releasing around 1 trillion yuan ($143.2 billion) in liquidity," Zhang said, adding that other tools may also be tapped to keep liquidity ample.

In terms of interest rate cuts, Feng Lin, executive director of research at Orient Golden Credit Rating International, said, "With policymakers prioritizing stable economic conditions at the start of the year, the first interest rate cut of 2026 could be delivered before the Spring Festival holiday, which would provide near-term support for the bond market."

However, Zhang noted that given that financing costs are already low, further cuts would need to preserve reasonable pricing relationships among loan rates, government bond yields and deposit rates.

At the annual work meeting, the central bank vowed to keep the overall social financing costs at a low level, instead of pushing the costs further down.

Zhang said the central bank may thus lower rates on selected structural monetary policy tools in the first quarter to support domestic demand, technological innovation and smaller enterprises.

Broad-based rate cuts, Zhang added, are still likely this year but may require the right timing, possibly triggered by any resurgence of China-US economic frictions, any increase in structural unemployment pressures, or any rise in property sector or financial market risks.

The PBOC said at the meeting that it will establish arrangements to provide liquidity to nonbank financial institutions under specific circumstances, highlighting its increasing emphasis on capital market stability.

The central bank also reiterated its commitment to keeping the renminbi exchange rate generally stable and guarding against overshooting.

zhoulanxv@chinadaily.com.cn