China's central bank promises policy support, stronger countercyclical adjustments

China's central bank has pledged to roll out additional pragmatic policy measures and step up countercyclical adjustments to consolidate the country's economic recovery, even as some other major central banks lean toward tighter monetary policy.

In its second-quarter monetary policy report released on Wednesday, the People's Bank of China said it will "plan and introduce practical and effective incremental policy measures in a timely manner" while making comprehensive use of monetary policy tools and adjusting them when deemed necessary.

Vowing to step up countercyclical adjustments, the central bank said it aims to maintain ample liquidity, relatively accommodative financing conditions and low overall financing costs.

The report noted that the external environment has become more complex due to weak global growth momentum, persistent geopolitical conflicts and trade frictions, ongoing supply shocks and imported inflationary pressures, as well as rising global inflation.

Against this backdrop, major central banks are shifting toward adjusting their monetary policies, the PBOC acknowledged, as the United States Federal Reserve held its policy rate steady, yet signaled a hawkish bias, while the European Central Bank and the Bank of Japan each raised rates by 25 basis points this year.

The PBOC struck a more confident tone on the domestic economy than in its first-quarter report, saying China's high-quality development has achieved new progress, underlying growth potential has continued to strengthen, and the foundations for the country's long-term economic prospects have become more solid.

The central bank said policymakers should remain confident and take concrete steps to consolidate and expand the country's steady economic recovery.

The report also highlighted efforts to steadily improve the monetary policy framework to better guide short-term money market rates to fluctuate around the policy rate.

The PBOC said it has gradually shifted its operational target rate toward the overnight money market rate. Since 2025, the central bank's focus of short-term rate management has gradually moved from the seven-day repo rate for depository institutions (DR007) to the overnight rate (DR001), with overnight transactions now accounting for more than 90 percent of money market repo trading.

On June 29, the central bank introduced overnight reverse repo operations in its open market operations for the first time, a move the PBOC report said would further improve the precision and effectiveness of its liquidity management and short-term interest rate regulation.

The PBOC added that, as bond financing expands, divergence between the growth of broad money supply (M2) or deposits and that of loans is a natural development. It does not indicate weaker financial support for the real economy, nor does it reflect idle circulation of funds.

"Both aggregate social financing and M2 growth remain above nominal GDP growth, indicating that monetary and financial conditions remain relatively accommodative," the PBOC said.