Monetary Policy Reloaded. Towards a New Growth Path in China

In recent months, the People’s Bank of China (PBOC) unveiled a comprehensive series of monetary policy measures and guidance that combines general easing and targeted support mechanisms.

In May, it cut the seven-day reverse repo rate from 1.5% to 1.4%, offered a 50-basis point reduction in the required reserve ratio (RRR), and lowered the interest rate on loans from the Housing Provident Fund. It also cut interest rates across its structural monetary policy instruments and launched two new facilities – one in support of bank lending to service sectors with a focus on elderly care and domestic service consumption, and one to expand funding for sci-tech innovation. In June, the PBOC joined five ministries to issue “Guidelines on Reinforcing Financial Support for Boosting and Expanding Consumption”. In early August, in collaboration with six other authorities, it released “Guidelines on Promoting Financial Support for New Industrialization”. In addition, shortly thereafter, it raised its quota for central bank lending for rural development as well as micro and small businesses and rolled out the consumer loan interest subsidy.

As in the last round of comprehensive monetary policy measures in September 2024, the PBOC’s dual approach aims not only for short-term stabilization, but also diversifying long-term growth engines. Its proactive policy steps are unfolding within a macroeconomic landscape shaped by both domestic transformation and external pressures. The country’s earlier growth paradigm – driven by resource-intensive fixed-asset investment and manufacturing – has reached a turning point. As these former engines lose momentum, their slowdown has become a primary source of macroeconomic fragility, weighing on demand, employment, and income growth. In this environment, policy is tasked not only with stabilizing short-term fluctuations but also with cushioning the adjustment from fading traditional drivers toward new, more sustainable sources of growth.

At the top level, policymakers are now seeking to guide the economy toward a new growth path, anchored in what policymakers describe as “new quality productive forces” (新质生产力) – including innovation, advanced manufacturing, green transition, digital development, and expanding domestic consumption. The recent top policy guidance on “curbing involution and reducing excess capacity” (反内卷、去产能) signals a continued ambition to transition.

This policy ambition is taking place amid persistent downward price pressure. Although real GDP growth reached 5.3% in the first half of 2025, the year-on-year change in consumer prices remains flat. The annual change in producer prices for industrial products continues to register negative readings. These conditions have kept real interest rates elevated and weakened the effectiveness of nominal rate cuts. Medium- and long-term loans to enterprises – especially private firms – have stagnated, lagging behind earlier levels, reflecting cautious profit expectations and weak investment appetite.

Externally, subdued global demand and escalating trade frictions have placed further strain on China’s manufacturing and export sectors. These challenges, combined with elevated interest rates in advanced economies, narrow the PBOC’s room for maneuver. A more aggressive domestic easing stance could exacerbate capital outflow risks, increase downward pressure on the renminbi, and complicate broader goals around financial stability and international currency credibility.

Harnessing Monetary Policy for Economic Transition

Against this macroeconomic context, monetary policy is increasingly tasked not just with short-term stabilization, but also with supporting the economy’s transition toward a more resilient, innovation-driven trajectory. As the structural limitations of the old investment- and property-led model become more apparent, the PBOC is operating with a complex mission: to manage cyclical headwinds while redirecting financial resources toward the foundations of a new growth path.

The general easing measures, i.e., the lowering of the 7-day repo rate and the RRR, show a clear emphasis on short-term stabilization. In addition, the PBOC deployed further targeted measures, including a reduction in the housing provident fund loan rate for first-time homebuyers, as well as targeted RRR cuts for auto finance and financial leasing companies to expand both household vehicle purchases and corporate equipment upgrades. Together, these steps are designed to support consumer demand and accelerate industrial upgrading.

In the context of the tools the PBOC explicitly refers to as structural, it has been aligning its structural monetary toolbox with the “Five Major Articles” (五篇大文章), a strategic framework aimed at fostering “new quality productive forces.” These pillars – Science and Technology Finance, Green Finance, Inclusive Finance, Finance for Elderly Care, and Digital Finance – are increasingly central to the reallocation of credit as reflected in recent stimulus measures and the new statistical monitoring efforts.

Science and Technology Finance receives the most expansive support, combining central bank facilities in support of the “Two New” policy (两新政策) targeting established firms, and the Sci-Tech Innovation Bond initiative, which focuses on earlier-stage technology enterprises and financial institutions investing in them. To enhance market participation, the central bank provides low-cost refinancing to eligible financial institutions that invest in these bonds, lowering their funding costs and indirectly supporting primary market absorption. As of early August, over 650 sci-tech bonds had been issued with a combined volume of RMB 848 billion, set to exceed RMB 870 billion, including pending deals. Around 76% have maturities longer than three years, with nearly 30% exceeding five years. However, over RMB 720 billion was issued by central and local SOEs, indicating that while the institutional scaffolding is in place, broader private sector participation remains limited at this stage.

Inclusive finance, particularly lending to small and medium-sized enterprises (SMEs), is a core pillar of structural monetary policy, but remains fraught with challenges. SME loans now exceed 60% of GDP, up from 37% in 2019 – reflecting policy-driven credit expansion that now surpasses even local government financing vehicle (LGFV) exposure. However, limited disclosure and prolonged COVID-era forbearance measures obscure the underlying credit risk. While comprehensive data remain unavailable, individual cases have revealed striking vulnerabilities – for example, the SME-specific NPL ratio at Dalian Rural Commercial Bank reached 27%, far above system-wide averages.

Green finance similarly benefits from dedicated refinancing, yet it is not insulated from broader macroeconomic pressures. Key sectors such as EVs, solar, and wind – often at the center of green policy – are now facing both domestic overcapacity and external trade constraints, making them a telling microcosm of the structural and external pressures confronting China’s economy. Many of these industries have grown rapidly and are now entering a phase of intensifying price competition, where continued preferential interest rates[1] may fall short in supporting healthy development. On the trade front, exporters of green products continue to face rising frictions despite their significant mitigation potential, while global arrangements to facilitate low-carbon trade remain limited and fragmented.

Beyond green technologies and services, a vast share of China’s real economy – including traditional industrial production and the physical capital stock – will be critical for the country. Industrial sectors such as steel, accounting for 15% of national emissions, are indispensable for low-carbon transition but face dual pressures: short-term survival and long-term decarbonization demands. These sectors often fall outside the current scope of green refinancing tools, yet they require urgent support for emissions-reducing upgrades and cleaner production technologies. Existing structural tools could be adapted to fill this gap – for instance, the Carbon Emission Reduction Facility (CERF) could be expanded to include high-emission sectors that have credible transition pathways, thereby shifting the focus from purely “green” assets to transitional outcomes.

At the same time, China’s vast urban environment offers substantial potential for improving energy-efficiency and green retrofitting. Targeted support for urban renewal – e.g., through the Pledged Supplementary Lending (PSL) facility or dedicated government bond issuance – could unlock financing for the renovation of older housing blocks, community amenities, and local public services. Together, these measures would help ensure that the transition encompasses not just the frontier sectors, but the foundational layers of China’s economy.

Taken together, these developments signal an evolving role for structural monetary policy – not merely as a tool for credit guidance, but as a means of shaping the quality of growth. As traditional drivers such as property and heavy infrastructure fade in systemic importance, the PBOC’s structural instruments are being asked to do more: support innovation, manage transition risks, and expand credit access in areas where market failures persist. The effectiveness of these tools will ultimately depend on how they are implemented, how well risks are managed, and how successfully they are aligned with complementary fiscal and regulatory measures. As China moves deeper into its economic transition, the challenge for monetary policy will be not only to sustain momentum, but to ensure that financial resources flow toward the sectors and activities most essential to building long-term resilience.

[1] Not all green loans and credits are eligible for central bank relending, i.e. the Carbon Emission Reduction Facility (CERF) at PBOC. By end of September 2024, CERF amounted to below 600 billion RMB while green loan reached 36 trillion RMB.

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