PBoC Sends Signals of Stabilizing and Prudent Support, Focusing on Long-Term Growth
The People's Bank of China (PBoC) reaffirmed its supportive monetary policy stance on Wednesday, December 24, while sending a signal of prudence toward aggressive stimulus measures, further reinforcing its policy orientation that favors long-term stability over short-term gains. (China News Service)
The PBoC reiterated its supportive monetary policy stance and signaled caution against aggressive stimulus measures, further strengthening its policy tilt toward prioritizing long-term stability rather than seeking immediate short-term results.
According to a statement released by the PBoC on Wednesday, December 24, following the fourth-quarter meeting of its Monetary Policy Committee, the central bank reaffirmed its commitment to keeping the overall social financing costs at a low level. It also pledged to intensify cross-cyclical adjustments. Bloomberg analysis on Friday, December 26, noted that this phrasing indicates the policy orientation is not merely focused on short-term fluctuations, but rather aims to avoid excessive stimulus to prevent structural imbalances.
Although the statement made no mention of interest rate cuts or reserve requirement ratio (RRR) reductions, the PBoC promised to comprehensively employ a variety of policy tools. This signals that despite the official communiqué of the Central Economic Work Conference mentioning the need to "flexibly and efficiently" use multiple policy tools such as RRR cuts and interest rate reductions, the central bank remains cautious about implementing large-scale easing measures.
Xinquan Chen, an economist at Goldman Sachs, stated in a report on Thursday, December 25, that such wording implies a preference for passive rather than active easing. The change in wording also suggests that monetary policy easing will be pursued in a more prudent and flexible manner.
Despite continued weakness in domestic demand in China—with retail sales growth last month hitting its lowest level since the COVID-19 shock—and fixed-asset investment on track for its first annual decline since records began in 1998, a slump exacerbated by shortages of infrastructure funding, the central bank has maintained a prudent strategy.
The PBoC Monetary Policy Committee stated that it will grasp the "intensity, pace and timing" of policy implementation based on domestic and international economic and financial conditions as well as the operation of financial markets. The central bank also reaffirmed its commitment to guarding against the risk of exchange rate overshooting and keeping the RMB exchange rate basically stable at a reasonable and balanced level.
The PBoC's prudent approach this year has repeatedly disappointed economists who expected more substantial interest rate cuts. This restraint reflects the central bank's deeper considerations: on the one hand, to protect the narrowing net interest margins of banks; on the other hand, to preserve policy space for potential future economic downturns.
While the Wednesday meeting statement mentioned maintaining "ample" liquidity, it emphasized "quality and efficiency" over the mere pursuit of scale. This indicates that any further easing will mainly be carried out in a targeted and precise manner.
Economists at China Galaxy Securities wrote in a report on Thursday that the PBoC may cut the RRR by 50 basis points in the first quarter to maintain ample liquidity in coordination with government bond issuances.
They noted that a total of 10 to 20 basis points in policy rate cuts are expected throughout 2026, but across-the-board interest rate cuts still await the right timing. Renewed twists and turns in China-US frictions or mounting pressure from structural unemployment could drive the implementation of monetary easing. On the other hand, risks in the real estate sector and financial markets may also trigger across-the-board interest rate cuts.
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