by YANG Zhijin
China will keep monetary policy "moderately accommodative" in 2026, a signal from the country's top leadership that Beijing wants to sustain growth while avoiding large scale easing. The guidance, delivered after the Politburo meeting on Dec.8, also brought back the concept of "cross cycle adjustment", suggesting that officials are trying to balance short term stabilization with longer term policy room.
Economists expect the growth target to remain around 5 per cent next year, the opening year of China's Fifteenth Five Year Plan. With fiscal policy expected to take the lead, the central bank is likely to provide supportive but measured monetary conditions.
Analysts say the scope for aggressive moves is limited. The seven-day reverse repo rate, China's main policy rate, stands at 1.4 per cent and is already close to what many economists view as its effective lower bound. Banks' net interest margins have narrowed to record lows, reducing their capacity to absorb larger cuts. The weighted reserve requirement ratio for banks is about 6.2 per cent, only slightly above previous informal limits, though the central bank has recently suggested it may reconsider those boundaries.
Even with these constraints, some easing is still expected. Inflation remains close to zero and the GDP deflator and factory gate prices are negative, meaning real interest rates are relatively high. Economists say this gives the central bank justification to trim rates or cut banks' reserve ratios again. The United States has also begun lowering interest rates, easing pressure on the renminbi and giving China more flexibility in its policy decisions.
"Lowering policy rates would help reduce funding burdens for the real economy, given that real interest rates remain relatively elevated," said ZHANG Xiaojing, director of the National Institution for Finance and Development. A policy analyst at a Beijing based brokerage said rate cuts face stronger constraints due to margin pressures, while reserve ratio cuts involve fewer tradeoffs.
Most forecasts point to only mild adjustments. Citi's chief China economist LIU Ligang expects the central bank to cut policy rates by about 20 basis points and lower the reserve requirement ratio by 50 basis points in 2026. He said the goal is to maintain a broadly stable and accommodative environment rather than deliver large stimulus.
China's central bank has already carried out significant easing in recent years, including 12 reserve requirement cuts and nine policy rate cuts since 2020. Officials say the impact of these earlier moves is still working through the economy. A commentary in the central bank's official newspaper noted that monetary policy affects activity with a lag and that the effects of stronger measures rolled out last year, including a package introduced in May, will continue to unfold.
The return of "cross cycle adjustment" to official language has also drawn attention. The term refers to Beijing’'s attempt to smooth policy across economic cycles and avoid excessive swings in either direction. It contrasts with counter cyclical measures that respond mainly to short term fluctuations. Economists say its reappearance suggests the central bank may prefer to rely more on liquidity tools such as open market operations rather than frequent changes to interest rates or reserve ratios.
ZHANG Lin, chief macro researcher at Far East Credit Rating, said new easing would depend on whether the economy faces a sharper downturn. "If exports or investment weaken significantly, policymakers may introduce additional measures. But if growth stays broadly stable, the focus will likely remain on the delayed effects of past easing and on structural tools," he said.
He expects the central bank to rely more on short term liquidity management, including reverse repos and other market operations, while treating rate cuts as a more cautious option. Annual rate reductions, he said, may total around 20 basis points if economic data do not deteriorate.
The Politburo's call to strengthen both counter cyclical and cross cycle adjustments indicates that policy intensity in 2026 is unlikely to exceed that of this year. Economists expect a potential reserve requirement cut early in the year to support activity, especially as long term liquidity remains tight and the latest cut took place in May.
China's experience in 2009 and 2010 also shows that a "moderately accommodative" stance does not guarantee further cuts. The central bank refrained from reducing rates or reserve ratios in those years as the economy rebounded and inflation pressures increased.
For now, economists say the central bank is likely to maintain a supportive but cautious stance, conserving policy space while relying on fiscal expansion and targeted credit tools to stabilize demand.
