The People's Bank of China released its second-quarter monetary policy report for 2026 on August 12, reiterating its commitment to a moderately accommodative stance. The central bank aims to integrate existing and new policies to foster a favorable monetary and financial environment for sustaining economic stability and improvement.

A dedicated section in the report suggests shifting focus away from loans as the sole financing metric and instead considering loans and bond financing together. It notes that capital-intensive sectors like real estate and infrastructure are adjusting, while the "new quality productive forces" require less bank credit per unit of economic growth. Concurrently, the importance of bonds and equities is rising, particularly for tech firms needing diverse funding across their lifecycle to match industrial transformation.

The central bank plans to proceed steadily with reforms to its monetary policy framework. It will conduct flexible and precise operations to maintain appropriate liquidity levels and guide short-term money market rates smoothly. By gradually increasing the frequency of overnight reverse repo operations based on demand from primary dealers, it aims to further smooth the transmission from policy rates to market rates.

Another section highlights the ongoing role of the relending facility for private enterprises. The PBOC will continue using market-based methods to encourage local financial institutions to increase credit supply to private firms, thereby improving financing access for small and medium-sized private enterprises.

The report also assesses the impact of monetary policy adjustments by major overseas economies. Over the past decades, such shifts have often caused significant spillovers. However, the current adjustment cycle is expected to be milder, with less impact than in the past. This is partly because the energy shock is less severe, with prices rising but not causing supply disruptions. Additionally, major economies have bolstered energy resilience through renewable transitions, diversified supply, and increased reserves, helping to buffer against supply shocks.

Comprehensive Assessment of Financial Support for the Real Economy

As China's economy transitions from high-speed growth to high-quality development, monetary credit is shifting from extensive expansion to intensive growth. This requires a broader perspective beyond the single metric of loan volume, moving toward a more objective and multi-dimensional view to accurately understand current monetary conditions and the scale and efficiency of financial services for the real economy.

Aggregate financing to the real economy (AFRE) and broad money supply M2 are key macro-financial indicators. AFRE measures total financial support to the real sector, including loans, bonds, trust loans, and equity financing. M2 includes cash in circulation and bank deposits, derived from bank asset expansion like lending and bond purchases. Both offer comprehensive views from different angles. As the economic and financing structure evolves, the composition of AFRE and M2 is changing. Between 2019 and 2025, the ratio of loan increments to M2 increments fell from about 107% to 63%, while the ratio of bond increments to M2 increments rose from about 32% to 44%. This shift does not indicate weaker financial support or idle funds. Discrepancies in growth rates between AFRE and M2 are normal due to different statistical scopes, and both currently exceed nominal GDP growth, indicating a relatively loose monetary environment.

Focusing on loans alone is no longer sufficient. Since the late 1990s, China has moved away from loan scale management. The adjustment of capital-intensive sectors like real estate and infrastructure, along with initiatives to reduce local government debt and financial institution risks, naturally reduces loan demand, though these are crucial for risk mitigation. The growing importance of bonds and equities is evident, especially for tech companies needing lifecycle funding. In the first half of this year, net corporate bond and equity financing reached 2.4 trillion yuan, up 1 trillion yuan year-on-year. Combined corporate loans, bonds, and equities totaled 13.5 trillion yuan, an increase of about 600 billion yuan.

Financial support now emphasizes quality over quantity. With a moderately accommodative policy, financial institutions have enhanced service capacity, lowering financing costs for enterprises. The financing structure is also improving. Total AFRE and M2 exceed 460 trillion yuan and 350 trillion yuan, respectively, with loans over 280 trillion yuan. Efficient use of existing funds and optimized allocation of new loans support the real economy. While loans to real estate and local government platforms are declining, lending is increasingly directed toward new economic drivers. Growth in inclusive small business loans, tech loans, and green loans has outpaced overall loan growth for years. Financial resources are concentrating on innovation and advanced manufacturing, with over 2,000 "specialized and new" enterprises listed on the A-share market and over 2.8 trillion yuan in sci-tech bonds issued since the "tech board" bond market was launched. Overall, financial support has shifted from scale expansion to quality and efficiency, making a multi-dimensional perspective essential for assessing its full impact.

Refining Short-Term Interest Rate Control Mechanisms

Controlling short-term money market rates is a common practice among global central banks, though methods vary. The Federal Reserve uses a target rate mode, setting a target for the effective federal funds rate (EFFR), while the European Central Bank (ECB) uses an operating rate mode, with the rate on its main refinancing operations (MRO) or deposit facility serving as the policy rate, both aiming to influence overnight rates.

China's interest rate control mechanism has evolved. Since 2024, the role of price-based regulation has strengthened: the 7-day reverse repo rate was confirmed as the primary policy rate, with fixed-rate, full-allotment operations enhancing its role as an anchor. The policy rate function of the 1-year Medium-term Lending Facility (MLF) was phased out, transitioning to a multiple-price auction. The target rate has shifted from DR007 to the overnight DR001 since 2025, with a clear signal sent in 2026. The toolkit has expanded to include 3-month and 6-month reverse repos alongside the 7-day and 1-year MLF operations. The temporary overnight positive/reverse repo facility, introduced in July 2024 with a narrower corridor (policy rate minus 20 bps to plus 50 bps), supports rate guidance and intervention. This framework has kept DR001 within the temporary repo corridor in recent years.

In June 2026, PBOC Governor Pan Gongsheng announced further refinements. First, the temporary repo corridor was narrowed to a symmetric 50 bps band (policy rate plus/minus 25 bps), reflecting smoother rate movements and more precise control. The trigger mechanism was also clarified, activating when DR001 persistently breaches the corridor, with the operation window moved to 3:00-3:30 PM. Second, an overnight reverse repo operation was introduced. Given that overnight repos now account for over 90% of money market trading, this addition improves liquidity management efficiency during periods of short-term demand, such as month-end or tax payments, reducing costs for institutions. The PBOC conducted its first overnight reverse repo operation in late June.

Looking ahead, the PBOC will continue reforming its monetary policy framework. It will conduct flexible and precise operations to maintain appropriate liquidity and guide short-term rates smoothly. By gradually increasing the frequency of overnight reverse repo operations based on primary dealer demand, it aims to further improve the transmission from policy rates to market rates.

Establishing a Private Enterprise Relending Facility to Support the Private Economy

In January 2026, the PBOC introduced a new 1 trillion yuan relending facility for private enterprises, designed to incentivize local financial institutions to support small and medium-sized private firms, including those considered "mid-tier" or "sandwiched" between large and small companies. The policy has been met with active participation from local financial institutions.

Private enterprise is a vital driver of China's economy. The central government has emphasized its importance, and the PBOC has strengthened financial support, including through 25 measures in 2023 and repeated increases in relending quotas for agriculture and small firms. However, financing remains uneven. Large private firms have stronger access, while small firms benefit from dedicated policies. Mid-sized private enterprises, often the backbone of the private sector, face a "sandwich effect," lacking both the diversified financing of large firms and the policy support for small ones.

To address this, the PBOC launched the 1 trillion yuan private enterprise relending facility on January 15, 2026. This facility provides low-cost funds (at 1.25% for one-year loans) to local financial institutions, linked to their lending to private small and medium-sized enterprises. The interest rate is favorable compared to the PBOC's aggregate tools or commercial bank wholesale funding, providing a clear incentive. The PBOC does not interfere with commercial decisions; institutions lend autonomously based on market principles and risk assessment.

The facility operates under a quota management system. Quotas are determined based on indicators like the balance and growth rate of loans to small and medium-sized private firms, using existing statistical standards to avoid extra burdens. Institutions can apply for funds within their quota, which is adjusted quarterly, rewarding those with faster loan growth. A regular evaluation mechanism, including quarterly off-site and annual on-site assessments, ensures policy effectiveness and closed-loop management.

Policy implementation was swift. Following the announcement on January 15, the official notice was issued on January 27, and local branches conducted outreach. First disbursements were made in February, and an online trading system was launched in June to reduce operational costs. By end-July, the outstanding balance of the facility reached approximately 800 billion yuan. As of the end of the second quarter, local financial institutions had extended about 15 trillion yuan in loans to small and medium-sized private firms, benefiting around 2.5 million businesses. The weighted average interest rate on new loans in the first half of 2026 was 40 basis points lower than the same period last year.

The PBOC will continue leveraging this relending facility to guide local financial institutions in increasing credit to private firms using market-based methods, thereby improving access to financing for small and medium-sized private enterprises.

Establishing the Interbank Market Data Repository

On June 16, 2026, the Interbank Market Data Repository (Shanghai) Co., Ltd. officially began operations in Shanghai. The repository collects and systematically analyzes high-frequency transaction data from various interbank sub-markets, supporting macro-control, enhancing market regulation, and facilitating high-level opening-up.

Following the Third Plenary Session of the 20th Central Committee and the Central Financial Work Conference, there is a focus on strengthening financial regulation and building a risk prevention system. Internationally, after the 2008 financial crisis, major economies agreed on the need to collect comprehensive transaction data to monitor markets and prevent insider trading and manipulation. The 2012 Principles for Financial Market Infrastructures (PFMI) by CPSS-IOSCO call for enhanced transparency to promote financial stability.

China's interbank market, established in 1997, has grown significantly in scale, product variety, and participant diversity. However, transaction and settlement data for money, bond, bill, and gold markets were previously dispersed across different infrastructures, hindering a comprehensive view of market operations and institutional behavior. The new repository addresses this by centralizing data collection, storage, analysis, and management, breaking down data silos to strengthen market monitoring and regulation.

The repository serves several key functions. First, it supports monetary policy and macro-prudential management by providing comprehensive data on bond, money, derivatives, bill, and gold transactions. This enables the PBOC and other authorities to assess policy transmission, understand fund flows, and monitor institutional behavior, enhancing the foresight of monetary policy and improving risk warning capabilities. Second, it improves market supervision and transparency. Centralizing data eliminates regulatory blind spots, enabling timely and accurate detection of abnormal transactions and misconduct. It also reduces information asymmetry among market participants, curbing herd behavior and promoting stable market operations. Third, it drives market and product innovation, supporting high-level opening-up. By leveraging digital technology, the repository can develop diverse financial products and services. Aligning with international standards, it helps domestic and foreign institutions understand the market, encouraging compliance and attracting more foreign investors, creating a controlled and open environment.

The PBOC will focus on strengthening the repository's organization, refining its rules, and supporting its role in identifying misconduct and systemic risks, thereby contributing to the stable, safe, and high-quality development of the financial market.

Monetary Policy Adjustments in Major Overseas Economies

Since the start of the year, geopolitical tensions in the Middle East have pushed up international oil and commodity prices, raising inflation in major economies. Central banks, including the Federal Reserve and the ECB, have adjusted or hinted at adjusting policies, which could have spillover effects on the global economy and financial markets.

As of end-July, the ECB and the Bank of Japan had raised rates, while the Fed held rates steady but signaled a hawkish stance. The ECB raised rates by 25 bps on June 11, and the Bank of Japan raised rates by 25 bps to 1% on June 16, the highest since 1995. On June 17, new Fed Chair John Walsh held his first meeting, keeping the federal funds rate at 3.5%-3.75% but emphasizing a strong commitment to price stability. At its July 29 meeting, the Fed held rates steady, but three dissenting votes favored a 25 bps hike, indicating a stronger tightening bias. Several emerging market central banks, like Indonesia (three 100 bps hikes this year), the Philippines (two 50 bps hikes), and South Africa (one 25 bps hike), have also tightened or turned hawkish.

Rising inflation is the primary driver. Key factors include: the Middle East conflict raising oil and commodity prices, which feed into downstream products; the AI investment boom driving up demand for chips and electricity, raising prices; and tariff increases, particularly in the US, adding to goods inflation.

The pace and intensity of tightening vary. Some central banks have taken preemptive action, showing a firm commitment to price stability. Others have used fiscal policies to cushion the impact of oil price rises, allowing more room for monetary policy to focus on inflation. Some face a trade-off between controlling inflation and supporting employment, or external pressures, leading them to wait and watch.

The current adjustment cycle is expected to be relatively mild compared to past episodes. The energy shock is less severe, with prices rising but not causing supply disruptions, and major economies have enhanced energy resilience through renewable transitions and diversified supply, buffering the impact. Furthermore, this adjustment is not a sharp reversal from extreme easing. Historically, rapid tightening after significant easing, like the post-2008 "taper tantrum" or the post-COVID rate hikes, caused major market disruptions. Since current policy remains somewhat restrictive, the shift represents a change in liquidity and rates rather than a complete policy reversal.

However, risks remain. In bond markets, high government debt levels could increase debt service costs. In equity markets, high valuations might trigger corrections as liquidity tightens. Emerging market economies, especially those with fragile fundamentals and high energy import dependence, need to monitor these spillover risks closely.