China's Monetary Policy Outlook: Will easing return in 2H2026?

1H 2026 Monetary Policy Review: From Active Easing to Policy Observation

1Q Policy Tone: Easing Continued, but the Language Became More Cautious

China's monetary policy framework underwent an important adjustment in 1H2026. While the People's Bank of China (PBoC) maintained the "moderately accommodative" policy stance adopted since September 2025, its communication became noticeably more measured.

The change was evident in official policy language. The March Government Work Report delivered during the National Two Sessions emphasised the "flexible and efficient use of multiple policy tools, including reserve requirement ratio (RRR) cuts and interest rate cuts." However, in the PBoC's 1Q2026 Monetary Policy Implementation Report released in May, the wording was revised to simply "flexible use of multiple monetary policy tools," with explicit references to RRR cuts and interest rate reductions removed.

We do not view this as a minor semantic adjustment. Rather, it signals a shift in the PBoC's policy operating framework. Since September 2024, successive rounds of RRR and policy rate cuts have pushed reserve requirements and interest rates to historically low levels, while liquidity injections through routine monetary operations have kept interbank funding conditions broadly accommodative.

Against this backdrop, the PBoC appears to be placing greater emphasis on policy calibration rather than outright easing. Policymakers are seeking to balance growth support with financial stability considerations, avoiding excessive stimulus that could place additional pressure on the renminbi, compress bank net interest margins, or fuel asset price distortions.

Money Market Performance: Liquidity Remained Ample and Market Rates Fell to New Lows

Market indicators suggest that monetary conditions remained broadly accommodative during 1Q2026. The PBoC maintained the 7-day reverse repo rate at 1.40%, while the interbank 7-day pledged repo rate (DR007) traded within a narrow range around the policy rate, indicating ample liquidity and effective policy transmission.

Funding conditions continued to ease across the financial system. The average yield on one-year negotiable certificates of deposit (NCDs) issued by AAA-rated commercial banks declined to 1.47%, down 18 basis points from end-2025 and reaching a historical low. Borrowing costs for households and businesses also remained highly supportive. The weighted average interest rate on newly issued loans stood at 3.23% in March 2026, while the average rate on newly issued corporate loans fell to 3.05%—both near record lows.

Taken together, these indicators suggest that despite the PBoC's more measured policy rhetoric, underlying monetary conditions remained accommodative, continuing to provide support for economic activity and credit demand.

Six Marginal Changes in the 1Q Report: Systematic Restructuring of the Policy Framework

A comparison between the 1Q 2026 Monetary Policy Implementation Report and the previous report shows six main changes. These cover operational tools, external policy attention, policy coordination, pricing mechanisms, exchange rate management, and structural tools.

Policy Dimension	Key Language in 1Q Report	Policy Signal
Operational Tools	Changed from “flexible and efficient use of multiple policy tools including RRR cuts and rate cuts” to “flexible use of multiple monetary policy tools”	Changed from “flexible and efficient use of multiple policy tools including RRR cuts and rate cuts” to “flexible use of multiple monetary policy tools”
External Attention	Added “closely monitor changes in monetary policy of major overseas central banks”	Added “closely monitor changes in monetary policy of major overseas central banks”
Policy Coordination	Added “strengthen monetary-fiscal policy coordination”	Added “strengthen monetary-fiscal policy coordination”
Pricing Mechanism	Added “guide financial institutions to improve interest rate pricing capability”	Added “guide financial institutions to improve interest rate pricing capability”
Exchange Rate Management	Upgraded from “strengthening expectation guidance” to “comprehensive measures to enhance resilience of the foreign exchange market”	Upgraded from “strengthening expectation guidance” to “comprehensive measures to enhance resilience of the foreign exchange market”
Structural Tools	Upgraded from “effective implementation” to “make good use of various structural monetary policy tools, optimise tool management”	Upgraded from “effective implementation” to “make good use of various structural monetary policy tools, optimise tool management”

Source: People's Bank of China, iFAST Research Department compilations

Data as of the release date of the 1Q Monetary Policy Implementation Report in May 2026

Among these changes, the most important are the removal of explicit references to “RRR cuts and rate cuts” and the new focus on overseas central bank policy. The former suggests a higher threshold for using broad-based easing tools, while the latter shows that overseas monetary policy is now being more clearly incorporated into China’s policy reaction function.

Three Drivers Behind the Policy Shift: Economy, Inflation, and Overseas Constraints

Economic Momentum: Growth Stabilised, Reducing the Immediate Need for Stimulus

The stronger-than-expected 1Q macro data was the main reason behind the shift in policy tone. Key indicators from 1Q 2026 through April showed a broad improvement in economic fundamentals.

Indicator	Reading	Data Period	Key Significance
GDP YoY Growth	5.0%	1Q 2026	At the upper end of the full-year target range
Export YoY Growth	+14.1%	April 2026	Significant pull from AI supply chain
CPI YoY	+1.2%	April 2026	Expanded by 0.2pp vs March
Core CPI YoY	+1.2%	April 2026	Maintained above 1% for multiple consecutive months
PPI YoY	+2.8%	April 2026	Turned positive for first time in 41 months
Commercial Bank NIM	1.40%	End of 1Q 2026	Hit new historical low
Newly Issued Corporate Loan Rate	3.05%	March 2026	Continued historical low

Source: iFinD, National Bureau of Statistics, iFAST Research Department compilations

Data as of April 2026

The PBoC's assessment of the economy also became noticeably more constructive in 1Q2026. In its 4Q2025 Monetary Policy Implementation Report, the central bank emphasised challenges such as the imbalance between "strong supply and weak demand." By contrast, the 1Q2026 report shifted its focus to the view that "the foundation for sustained economic improvement still needs to be further consolidated."

While subtle, this change in wording reflects an important shift in policy emphasis. The earlier narrative centred on insufficient demand and the need for stronger policy support. The latest assessment acknowledges that the recovery is already underway, with policymakers now focusing on sustaining and strengthening the momentum rather than jump-starting growth.

The report also introduced more explicit references to China's institutional strengths, vast domestic market, and industrial competitiveness, underscoring policymakers' confidence in the country's medium- to long-term growth prospects. With economic activity starting 2026 on a firmer footing, the urgency for aggressive monetary stimulus has diminished. Instead, policymakers appear increasingly comfortable pursuing a more measured and targeted approach, aimed at supporting growth while preserving financial and macroeconomic stability.

Inflation Recovery: Passive Decline in Real Rates Reduces the Need for Nominal Rate Adjustment

The improvement in inflation dynamics was another factor behind the PBoC's increasingly measured policy stance. Consumer price pressures continued to recover, with CPI rising 1.2% year-on-year in April, up from 1.0% in March. Core CPI, which excludes food and energy, also increased 1.2% year-on-year and has remained above 1% for several consecutive months, suggesting that underlying domestic demand is gradually strengthening.

An even more significant development came from producer prices. PPI rose 2.8% year-on-year in April, marking the first positive reading after 41 consecutive months of deflation. On a month-on-month basis, producer prices have now increased for seven straight months, indicating that pricing power is gradually returning across parts of the industrial sector.

The recovery in inflation is particularly important from a monetary policy perspective because it affects real interest rates. As inflation rises, real borrowing costs decline even if nominal policy rates remain unchanged. In effect, financial conditions become more accommodative without the need for additional rate cuts, providing a degree of automatic policy support to the economy.

Against this backdrop, the urgency for further broad-based monetary easing has diminished. This helps explain why the PBoC has shifted away from explicitly referencing "RRR cuts and interest rate cuts" and instead adopted the broader formulation of "flexible use of monetary policy tools." The change signals a preference for a more calibrated and targeted approach, reflecting growing confidence in the recovery while retaining sufficient flexibility to respond to evolving economic conditions.

Imported Inflation: A New Variable in the Policy Framework

One of the most notable changes in the 1Q 2026 report was the return of imported inflation to the PBoC’s risk assessment. The report stated that “supply shocks and imported inflationary pressures have emerged somewhat”. It also noted that Middle East geopolitical events had pushed up international crude oil and some commodity prices, contributing to the rebound in China’s price indicators.

This is the first time since 2022 that imported inflation has reappeared in the PBoC’s report.

This round of imported inflation has mainly affected China through oil and non-ferrous metal supply chains. Higher international crude oil and metal prices have lifted factory-gate prices in mining, smelting, and processing sectors. This was an important factor behind the recovery in PPI.

The key question is whether this is the beginning of broad-based inflation or simply a structural supply shock. The distinction is important for policy.

Distinguishing Dimension	This Round of Imported Inflation	Typical Broad-Based Inflation
Source of Driver	External supply shock from geopolitical events and higher commodity prices	Domestic demand overheating and a positive output gap
Price Transmission	Concentrated upstream, with limited transmission to midstream and downstream sectors	Broad price increases across the economy, with risk of a wage-price spiral
End Demand	Mild core CPI, weak food prices, and soft demand	Strong core CPI and robust demand
Policy Response	Structural easing may be needed to support squeezed downstream sectors	Aggregate tightening may be needed to cool demand

Source: iFAST Research Department compilations

Based on this framework, the current inflation rebound looks more like a structural supply shock than broad-based inflation. Upstream prices are rising, but core CPI remains mild and final demand is still weak. Price pressures are not being passed through effectively to midstream and downstream sectors.

This means imported inflation has entered the PBoC’s policy framework, but it has not changed the direction of monetary policy. If anything, cost pressures on midstream and downstream enterprises may increase the need for targeted structural support.

The PBoC’s language also supports this interpretation. The 1Q 2026 report uses the neutral phrase “close monitoring”. This is less forceful than the language used during the Russia-Ukraine conflict in 2022, when the central bank referred to “guarding against” or “being vigilant against” an inflation rebound. The latest report also did not use restrictive language such as avoiding “flood-like stimulus”.

2H 2026 Policy Outlook: Is There Still Room for Rate Cuts?

The key question for 2H 2026 is whether China can still cut rates when major overseas central banks are either pausing rate cuts or discussing rate hikes.

The answer depends on four factors: the nature of overseas policy tightening, domestic economic momentum, exchange rate conditions, and monetary-fiscal coordination.

Overseas Policy: Tightening Is Driven by Imported Inflation, Not Overheating Demand

Markets often treat overseas rate hike discussions as the start of a new tightening cycle. This view is too simplistic. Current overseas policy caution is mostly driven by imported inflation from higher energy prices, not by overheating domestic demand.

Central Bank	Policy Dynamics	Driver and Nature
US Federal Reserve	Maintained at 3.50%–3.75%	Troubled by oil price rises from Middle East conflict, shifted to 'wait-and-assess' mode
European Central Bank	Unchanged, rate cut cycle ended	Energy-driven inflation recovery, slightly hawkish stance but no action yet
Bank of England	Continued easing but at a slower pace	Inflation stickiness makes subsequent rate cuts a 'more difficult trade-off'
Bank of Japan	Maintained at 0.75%, in gradual rate hike mode	Monetary normalisation process; energy shock may strengthen rate hike inclination
Reserve Bank of Australia	Pivoted after 2025 cuts; raised rates to 4.35% cumulatively in 2026	Energy and capacity pressures driving inflation, proactively addressing imported pressure

Source: Public information from respective central banks, iFAST Research Department compilations

Data as of May 2026 (Reserve Bank of Australia cash rate raised to 4.35% in May 2026, following three rate cuts in 2025 and three consecutive hikes since pivoting in 2026)

The common thread is clear. Whether it is the Fed and ECB pausing, or Japan and Australia raising rates gradually, the main driver is imported inflation from higher oil and commodity prices. This is not the same as the 2022 rate hike cycle, when the Fed tightened aggressively in response to runaway core inflation.

This distinction matters for China. China faces the same imported inflation shock, but its domestic demand remains weak and core CPI is still mild. As a result, overseas central banks becoming more cautious does not automatically constrain China’s monetary policy. China can still maintain a policy stance that reflects its own growth and inflation conditions.

Domestic Economic Momentum: Most Likely to Weaken Marginally in 2H

Although 1Q data was strong, some of the underlying concerns may become more visible in 2H.

Export growth has partly benefited from front-loading amid tariff uncertainty. In 2H, export growth may slow as the base effect rises, earlier demand pull-forward fades, and potential US tariff measures take effect.

Domestic demand also remains fragile. Total social financing stock growth slowed to 7.8% YoY in April, while RMB loan growth slowed to 5.6%. Both household and corporate medium- to long-term loans declined YoY, while bill financing increased. This suggests that genuine credit demand from the real economy remains weak.

The property market is still under pressure. Property development investment fell 11.2% YoY in January-April. The “spring recovery” was mainly supported by second-hand transactions in core cities, rather than a broad-based recovery in new home demand.

Manufacturing momentum has also yet to consolidate. The manufacturing PMI has remained below the expansion-contraction threshold for an extended period, including a reading of 49.0 in February.

Overall, if exports slow and domestic demand remains weak in 2H, the PBoC will have a clear reason to consider another round of easing.

Imported Inflation Is Unlikely to Prevent Further Easing

As discussed earlier, this round of imported inflation is more similar to a structural supply shock than broad-based inflation. Historically, the 2020–2022 round of imported inflation was also weakened by soft domestic demand and the property downturn. It eventually became a one-off structural shock rather than a sustained inflation cycle.

If final demand does not recover strongly this time, imported inflation is more likely to result in higher costs and margin pressure for corporates, rather than broad price increases and economic overheating.

In that scenario, the PBoC would have little reason to tighten. Instead, it may need to use structural easing tools to support midstream and downstream enterprises facing cost pressure.

Exchange Rate Pressure: Appreciation, Not Depreciation, Is the Main Issue

Exchange rate pressure is often cited as a reason why China may not be able to cut rates. However, the situation in 1Q 2026 was very different from the 2022–2024 period.

In 1Q 2026, the renminbi appreciated, supported by corporate foreign exchange settlement and a weaker US dollar. USD/CNY broke below 6.8. Market concerns shifted from depreciation pressure to the possibility of excessive appreciation.

The PBoC is also better prepared to manage exchange rate volatility. The 1Q report’s language on using “comprehensive measures to enhance resilience of the foreign exchange market” suggests that the central bank has access to countercyclical tools such as the FX risk reserve ratio and macro-prudential parameters for cross-border financing.

China’s balance of payments position also provides support. The current account surplus remains within a reasonable range. Goods trade has grown 47% over the past five years, while services trade imports and exports exceeded USD 1tn in 2025, according to MOFCOM.

In this context, the expansion of the exchange rate toolkit should be seen to preserve monetary policy flexibility, rather than as a constraint on domestic easing.

Banking System Pressure and Monetary-Fiscal Coordination Support Lower Rates

Internal pressure from the banking system also supports the case for lower rates. Commercial bank net interest margins are a key indicator. At the end of 1Q 2026, commercial bank NIMs fell another 2bps from year-end to 1.40%, a new historical low.

Banks are still facing pressure from the repricing of existing loans and falling rates on new loans. To offset lower asset yields, banks need to reduce liability costs. Deposit rate cuts are the key mechanism to achieve this. Policy rate cuts can provide the basis for market-oriented adjustments in deposit rates.

Monetary-fiscal coordination also requires a low-rate environment. Fiscal policy has become more expansionary this year, including the RMB 100bn monetary-fiscal coordination fund to support domestic demand, RMB 800bn in policy financial tools, and various debt resolution measures for local government financing vehicles.

These measures require monetary policy support in two ways. First, low interest rates can reduce government financing costs. Second, a stable bond market can help absorb large-scale issuance. The new language in the 1Q report on “strengthening monetary-fiscal policy coordination” reflects this shared need.

Rate Cut Outlook: Timing, Magnitude, and Form

The case for further easing in 2H 2026 can be summarised as follows:

Supporting Logic	Key Evidence	Directional Support for Rate Cuts
Economic momentum may weaken	Export front-loading may fade, total social financing growth slowed to 7.8%, and property investment fell 11.2% YoY	Export front-loading may fade, total social financing growth slowed to 7.8%, and property investment fell 11.2% YoY
Imported inflation is not broad-based	Core CPI was only 1.2%, food prices fell 1.6%, and upstream price increases have not fully passed through	Structural easing may be needed to support squeezed downstream sectors
Bank NIMs are at historical lows	Commercial bank NIMs fell to 1.40%, increasing the need to lower liability costs	Deposit rate cuts and policy follow-through may be needed
Fiscal expansion needs monetary support	RMB 800bn policy financial tools, RMB 1.3tn ultra-long-term special government bonds, and local debt resolution all require low financing costs	Low rates can support fiscal expansion

Source: iFAST Research Department compilations; fiscal data from the 2026 budget report approved by the National People's Congress and Ministry of Finance announcements

Based on the above, further easing remains possible in 2H 2026. The most likely timing is late 3Q to 4Q, after the PBoC has assessed 2Q data on exports, PMI, and total social financing. The central bank may also wait for greater clarity on whether the Middle East conflict leads to more persistent inflationary pressure.

The likely magnitude is modest, at around 10–20bps. The more likely form is an asymmetric rate cut, with the 5-year-plus LPR guided lower to support residential mortgages and stabilise the property market.

That said, the no-rate-cut scenario should also be considered. If the Middle East conflict escalates further, oil prices stay high and feed into CPI; if exports remain strong after the front-loading effect fades; if domestic demand recovers more strongly than expected; or if the US dollar strengthens sharply and creates renewed depreciation pressure on the renminbi, the PBoC may choose to keep rates unchanged.

This is the core meaning of the current wait-and-see phase. The PBoC has kept its policy options open and will respond dynamically to incoming data.

A-Share Allocation in a Wait-and-See Policy Environment

The above analysis suggests that, even if easing in 2H 2026 is gradual and asymmetric, the direction of policy still points toward accommodation.

For A-shares, the direction of policy is often more important than the size of a single rate cut. Sustained easing expectations can lower discount rates, improve investor risk appetite, and provide valuation support for Chinese core assets.

This support is broad-based. It is not limited to traditional interest-rate-sensitive sectors. As the two largest sectors in the CSI 300, Information Technology and Financials benefit from easing in different ways.

For the technology sector, the main benefit comes through valuations. Tech stocks usually have longer-duration cash flows, making their valuations more sensitive to discount rates. When rates decline, the present value of future cash flows rises, making the sector more responsive to easing cycles.

However, the long-term performance of the technology sector still depends on industry fundamentals. Monetary easing can support valuations, but earnings growth will be driven by areas such as the AI supply chain. Chinese AI companies still trade at a meaningful valuation discount compared with global peers. For example, DeepSeek’s post-financing valuation is estimated at around RMB 35–40bn, or USD 5.2–5.9bn, while US peer Anthropic’s IPO filing valuation is USD 96.5bn. This valuation gap highlights the potential re-rating space for Chinese AI firms.

For the financial sector, the impact of rate cuts needs to be assessed from both the asset and liability sides. In recent years, the PBoC has repeatedly guided the LPR lower to support real economy financing. This reduced loan pricing and compressed banks’ asset yields. Because deposit rate cuts lagged behind, liability costs did not decline by the same amount. As a result, bank NIMs narrowed and earnings came under pressure. This explains why the market often views rate cuts as negative for bank stocks.

The current environment is different. This round of rate adjustment is more likely to involve both lending and deposit rates falling together. Deposit rate cuts would lower banks’ liability costs and partly offset the decline in loan yields. This could help stabilise NIMs. At the same time, the peak impact from the repricing of existing mortgage loans has largely been absorbed.

Beyond technology and financials, the CSI 300 also has meaningful exposure to cyclical sectors such as Industrials and Materials. Industrials should benefit from fiscal expansion and stronger monetary-fiscal coordination. Policy financial tools and ultra-long-term special government bonds can support infrastructure and advanced manufacturing, while lower financing costs help capex-intensive companies.

Materials are more directly linked to the recovery in PPI. As a procyclical sector, Materials can benefit from upstream price recovery and supply-side structural optimisation.

A gradual recovery in domestic demand also provides earnings support for consumer and industrial sectors. China’s services PMI rose to 54.4 in May 2026, marking the fastest expansion in three months. New orders reached their highest level since November 2025, led by e-commerce, entertainment, and IT services. The recovery in EV demand was also notable. China’s new energy passenger vehicle sales reached 1.36mn units in May 2026, up 12% YoY and 11% MoM. BYD delivered 376,990 units during the month.

In summary, an accommodative monetary environment provides valuation support for the CSI 300. At the same time, AI strength, domestic demand recovery, and fiscal expansion provide earnings support across sectors such as Information Technology, Consumer, Industrials, and Materials. This gives the index support from both valuations and earnings.

For a fuller discussion of the CSI 300’s sector structure, valuation discount, and earnings drivers, please refer to iFAST Financial Research Department’s report: “Policy Anchor and Valuation Re-rating: The Time to Allocate to the CSI 300 Has Arrived”.

Allocation Vehicle: E Fund CSI 300 ETF (510310.SH)

Among passive allocation vehicles, the E Fund CSI 300 ETF (510310.SH) is a viable way to capture the above investment theme. The fund offers scale, liquidity, low fees, and close index tracking.

The fund was established on 6 March 2013 and is one of the leading CSI 300 ETFs by assets and liquidity. As of 3 June 2026, it had AUM of approximately RMB 105.9bn and around 22bn units outstanding.

The fund is managed by E Fund Management Co., Ltd., which was established in 2001 and has total AUM exceeding RMB 3tn. The ETF is co-managed by Yu Haiyan and Pang Yaping, both of whom have served since April 2016.

The fee structure is competitive. The management fee is 0.15% per year and the custodian fee is 0.05% per year, bringing the total holding cost to approximately 0.20% for a one-year holding period.

On valuation, the CSI 300 Index is trading at a FY2026E P/E of approximately 13.1x. This is materially below our assumed fair P/E of 15x and remains low relative to the past decade.

Based on iFAST Research Department’s internal earnings forecast model, applying a 15x fair P/E to the 2028E EPS estimate of RMB 1.47 gives a CSI 300 target of 6,285 points. This implies approximately 28% potential upside over three years from 2026 levels. The return would be mainly driven by earnings growth, without relying on significant valuation expansion.

Risk Factors

●     Further escalation of the Middle East conflict: If oil prices remain high and feed into CPI, imported inflation could move beyond a structural supply shock. This may limit the room for monetary easing and slow the valuation recovery.

●     AI sector strength and commercialisation below expectations: If global AI capex slows or domestic AI applications commercialise more slowly than expected, earnings growth in the Information Technology sector may disappoint. This would create headwinds for valuation recovery.

●     Domestic demand recovery below expectations: If exports weaken after front-loading effects fade and domestic demand does not recover in time, corporate earnings may lag expectations. This would affect the EPS growth path and slow the broader market recovery.

Disclaimer: This report is prepared by iFAST Financial Research Department for informational purposes only and does not constitute any invitation to buy or sell securities or investment advice. All forecasts and valuations in the report are based on publicly available information and the team's independent judgement, and no warranty is given as to their accuracy or completeness. Past performance is not indicative of future results. Investors should independently assess relevant risks and seek professional advice where necessary before making any investment decision.