PBOC to enhance policy adjustments and targeted approach

China's central bank has newly flagged "structural divergence" in the economy, a shift that analysts said signals a greater likelihood of proactive easing in the second half of the year to cushion downside risks as imported inflation pressures begin to ease.

In a statement late on Wednesday after the second-quarter meeting of its monetary policy committee, the People's Bank of China said the economy has remained generally stable and continued to improve in quality, but still faces challenges including strong supply, weak demand, structural divergence and external shocks.

The reference to "structural divergence" was a new addition compared to the previous quarterly meeting, as well as the bank's latest monetary policy report released in May.

The meeting also changed the overall monetary policy wording from "making comprehensive use of various policy tools and strengthening monetary policy adjustments" in the first-quarter meeting to "enhancing the forward-looking, flexibility and targeted nature of policy".

Analysts said the new wording carries significance as debate has intensified over a "K-shaped" recovery in China's economy, with artificial intelligence-related sectors and manufacturing holding up better while property, infrastructure and consumption remain under pressure.

The shift also came as the market awaits a key mid-year meeting of top policymakers to set the macro policy tone for the second half.

Zhang Di, chief macro analyst at China Galaxy Securities, said the statement indicates that macro policies in the second half are likely to place greater emphasis on the impact of structural divergence during the transition from old to new growth drivers, with more proactive countercyclical measures to stabilize the economy.

Zhang said monetary policy may move earlier and more proactively than other macro policies to stabilize employment, businesses, markets and expectations.

He added that once producer prices potentially peak in July, there could be greater room for broad-based cuts in interest rates and the reserve requirement ratio, with the third quarter likely serving as a key window for such cuts, especially as government bond issuance is set to accelerate.

Data released by the National Bureau of Statistics on Thursday showed that a sharp decline in international oil prices has sent China's imported inflation pressures tapering. The producer price index, which gauges factory-gate prices, dropped 0.3 percent from a month earlier, though it remained up 4.1 percent year-on-year.

Many analysts expect energy prices to trend lower in the second half, allowing PPI to gradually retreat after peaking around midyear and creating more scope for easing.

Nevertheless, Ming Ming, chief economist at CITIC Securities, said the latest PBOC meeting suggested a marginal moderation in policy tone, and he expects monetary policy tools to remain broadly prudent in the next stage.