China Economy: Signal of moderate monetary easing

CMB International Global Markets |MacroResearch | EconomicPerspectives China Economy Signal of moderate monetary easing Bingnan YE, Ph.D(852) 3761 8967yebingnan@cmbi.com.hk China’s outstanding social financing growth exhibited a notable decelerationtoward the end of 2025. This trend, coupled with a sharp slowdown in M1 supplygrowth,underscores a cooling in economic activity and private sectorconfidence. There is a persistent economic imbalance between robust supplyand weak demand as the corporate sector remains the primary engine of creditexpansion and the household sector continues to prioritize deleveraging overnew borrowings. In response, the People’s Bank of China (PBOC) has signaleda shift toward a more accommodative stance and additional property stimulusfor 2026, characterized by cuts in structural re-lending facilities and minimumdown payment ratio forcommercialproperty loans. Looking ahead, the centralbank has indicated additional room for interest rate and RRR cuts, withexpectations of a 50bps RRR cut and two 10bps LPR reductions this year.Regarding exchange rate policy, the central bank remains committed tomarket-driven flexibility and RMB resilience. The USD/RMB is projected to decline to6.93 at end-1H26 before rising to 6.97 by year-end. Frank Liu(852) 3761 8957frankliu@cmbi.com.hk Credit and M1 growth slowed down as economic activities weakened.Outstanding social financing growth continued todecline from 8.7% at end-3Q25 to 8.5% at end-November and 8.3% at end-December, indicating aslowdown of broad credit growth. Outstanding government bond financinggrowthmoderated from 18.8%at end-November to 17.1%at end-December as the fiscalexpansion momentum softened. Outstanding RMBloan growth remained unchanged at 6.4% at the year end, but new RMBloan financing dropped 8.1% in December with the loan funding to businesssector up 118.4% and that to household sector remaining negative. Newmedium-and long-term loans to households dropped 96.7% YoY, ashousing sales continued to slump. Despite a YoY increase of bond and loanfinancing in the corporate sector, broad economic activity and privateconfidence weakened as M1 supply growthdecelerated from 7.2% at end-3Q25 to 4.9% at end-Novemberand3.8% at end-December. 80% of M1was demand deposits, which were oriented to economic transactions. Source: Wind, CMBIGM Sectordivergence showed economic imbalance.The loan datarevealed a stark economic imbalance with robust supply and weakdemand. The corporate sectorremained the primary engine of creditgrowth, partially supported by the low-cost special loans targetingspecificsectors.In sharp contrast,the household sector remained in thedeleveraging trap withmore debt repaymentsthan new borrowings.Thehousehold sector’s reluctance to borrow is partially due to the balance-sheet effect following the property market slump.With housing prices downover 35% in major citiessince 3Q21,the erosion of household wealth andconfidencehas severely dampened consumer spending and reflationarymomentum. Unlike the US subprime or Eurozone sovereign debt crises,Chinese households instead of banks bear the primary burden of assetdevaluationas themortgage non-performing loan (NPL) ratiosremain low.China’s system features high down payment requirements and stronglender protections.Legal constraints on personal bankruptcy and deepcultural attachment to homeownership, rooted in traditional values of familysecurity and social status, deter borrowers from defaulting even in distress.Consequently, Chinese householdsabsorb most of the balance-sheetimpactsof property market slump,contributing to weakened confidenceand spending power.After decades of viewing real estate as a "sure bet,"the current price correction hastriggered a psychological pivot towardfinancial conservatism. Households are now prioritizing "balance-sheetrepair" over consumption, a behavior that presents a significant challengeto the government's goal of a consumption-led recovery. Central bank signaled moderate easing ahead.After the credit datarelease, PBOC officials held a press conference yesterday to outline themonetary policy direction this year.First, the PBOC announced immediaterate cuts by 25bps to structural re-lending facilities and massive supplyexpansion of these facilities, indicating stronger policy support to targetedsectors. These structural re-lending facilities with lower rates than generalre-lending facilities mainly aim at incentivizing banks to expand creditsupplyto private enterprises,tech companies,green development,agriculture, elderly care and other targeted sectors. By focusing on thosespecific sectors, the central bank tries to influence the allocation of creditsupply to make it in line with top leaders’ target of high-quality developmentand common prosperity.We believe the integration of these structuralmonetary policy tools with fiscal policy such as interest subsidies and creditguaranteescreates a powerful policy multiplier to support China’ste