On January 15, 2026, Beijing time, the People's Bank of China announced a reduction of 0.25 percentage points in the interest rates of various structural monetary policy tools, with the one-year re-lending rate simultaneously lowered to 1.25%. Other term tools were also adjusted by the same margin. This seemingly mild operation points to China's attempt to support economic structural adjustments within a limited monetary policy space, against the backdrop of a temporary easing of external constraints and the combined pressures of internal growth and transformation. Unlike a comprehensive reduction in policy rates or the use of reserve requirement cuts, this choice to adjust structural rates focuses on specific areas and terms, signaling "targeted support rather than broad-based easing." It also sets the stage for discussions on policy intentions and potential side effects: is this structural rate cut a practice of precise drip irrigation, or the beginning of another round of nominal easing?

1.25% for One Year: Structural Rates Become the New "Anchor Point"

In this round of operations, the central bank uniformly lowered the rates of a package of structural monetary policy tools, such as re-lending and re-discounting, by 0.25 percentage points, bringing the one-year re-lending rate down to 1.25%, creating a symbolic "price anchor" among various tools. Unlike traditional policy rates or open market operation rates, structural tools are not aimed at all financial institutions and all assets; instead, they lock low-cost funds into specific areas by setting purposes, targets, and quotas. Their logic is closer to "targeted drip irrigation" rather than the "flood irrigation" of broadly lowering interest rates and universally injecting base currency. Without touching the open market operation rates or the loan market quoted rates, and without significantly adjusting the statutory deposit reserve ratio, the central bank chose structural rates as the focus of this adjustment, clearly intending to release easing signals to areas that need support without changing the overall interest rate corridor and the framework of bank liability costs. This approach may not necessarily lower the average interest rate level across society on paper, but it could guide banks to expand asset allocation in certain directions through preferential rates combined with assessment indicators. However, the question arises: can these targeted quotas truly flow precisely to the areas with the strongest financing constraints and the highest marginal effects, or will they be allocated more to borrowers with higher credit quality and lower risk under the multi-layered screening of financial institutions, or even be used by some banks for term mismatches and arbitrage? This will determine the real effectiveness of this structural easing.

After Net Interest Margins Stabilize: How Much Can Banks Afford to Give Up?

Since 2025, the overall net interest margin of the banking system has shown signs of stabilization. After several years of continuously lowering loan rates and ceding part of the interest spread to support the real economy, the pressure on asset yields has temporarily eased, providing some space for the central bank to lower the rates of structural tools again. The current reductions are concentrated on structural tools like re-lending and re-discounting, meaning that the cost for banks to obtain this portion of funds will decrease simultaneously, theoretically transmitting to the asset side as a "buffer" for further declines in loan rates for new or specific direction loans. However, the bank's net interest margin is already built on a delicate balance between deposit costs and asset yields. With an average statutory deposit reserve ratio of 6.3%, the shift in monetary policy from early emphasis on "total easing" to "structural optimization" also reflects a weighing of the banking system's stability: not easily resorting to more impactful reserve requirement cuts, but rather adjusting through structural rates, attempting to lower prices for specific areas without significantly compressing the overall interest margin. The real test lies in whether, if the demand from the real economy recovers less than expected, further concessions under structural preferential rates can translate into substantial improvements in asset quality, or merely result in more low-interest, low-return but high-risk assets, further compressing the profit buffer of especially small and medium-sized banks. This will directly relate to the future banking system's ability to undertake more policy tasks.

The Wave of Long-term Deposits Maturing Approaches: Structural Rate Cuts and Liability Repricing

In 2026, a significant amount of 3-year and 5-year long-term deposits will mature, and both residents and enterprises will face a critical window for repricing their "long money" locked in at relatively high interest rates. A large number of high-interest deposits, upon maturing, will be renewed at rates significantly lower than the original levels, releasing some cost space on the liability side for banks and inevitably triggering comprehensive adjustments in banks' product design and pricing strategies. Lowering structural tool rates at this time helps banks reprice synchronously on both the asset and liability sides: on one hand, obtaining re-lending and re-discounting funds at lower costs reduces the marginal cost of credit allocation to key areas; on the other hand, combined with the passive reduction in interest rates on maturing deposits, it reserves policy support for further declines in overall liability costs. However, the risk appetite of residents and enterprises remains weak, and their preference for low-risk deposits and wealth management products has not fundamentally changed. Even if structural credit easing continues to release policy signals, guiding some "long money" into longer-term, higher-risk real projects rather than simply rolling into a new round of relatively high-interest deposits or short-term wealth management products still faces considerable resistance. More worryingly, if during this repricing window, the investment returns in the real sector remain low, banks, under risk constraints and assessment pressures, may be more inclined to concentrate structural preferential quotas on "preferred clients," further increasing support for leading enterprises and state-owned entities to ensure that bad risks remain controllable. This may objectively exacerbate the trend of funds concentrating on higher credit-rated entities, providing limited help to small and micro enterprises and private entities that truly face financing difficulties and high costs.

The Dollar Enters a Rate Cut Cycle: Temporary Easing of Renminbi Constraints

From the external environment, officials have publicly stated that "the Renminbi exchange rate is relatively stable, the dollar is in a rate cut cycle, and the exchange rate does not constitute a strong constraint," highlighting an important premise for advancing this round of structural rate adjustments. Over the past few years, the constraint of "stabilizing the exchange rate" on monetary policy independence has always existed, and every discussion of interest rate cuts or reserve requirement reductions cannot avoid the potential chain reactions on the Renminbi exchange rate and cross-border capital flows: on one hand, the narrowing or even inversion of internal and external interest rate differentials can easily strengthen some market participants' expectations of currency depreciation; on the other hand, the marginal changes in capital outflows can also affect domestic financial conditions and policy maneuvering space. With the dollar entering a rate cut cycle and external high-interest rate pressures easing, adjusting structural rates rather than lowering more benchmark policy rates or fully releasing reserves can internally release moderate easing signals to support domestic economic recovery while relatively gently controlling the impact on exchange rate expectations, extending the window for relatively autonomous monetary policy operations. The temporary characteristics of this window period are also worth noting: if the Federal Reserve's rate cut pace becomes erratic in the future, or if unexpected external risk events disturb global risk appetite, the Renminbi exchange rate may still face more severe two-way fluctuations, and at that time, the space for further easing through interest rate and liquidity tools will again be limited. Therefore, this structural rate cut appears more like a preemptive operation during a marginal relaxation of external constraints, aimed at seizing time and implementing some support intentions in advance.

Targeted Drip Irrigation or Nominal Easing: The Test of Structural Tools

From the policy statement, "improving structural monetary policy tools and increasing support" has become a direction that officials have repeatedly emphasized recently. This round of structural rate adjustments continues the path of "tool optimization + targeted support," rather than simply pursuing further declines in nominal interest rate indicators. Theoretically, these tools should be directed more towards areas with prominent financing constraints, such as agriculture, small enterprises, and the private economy, where the yield and employment multiplier effects are higher, guiding financial resources towards the directions that policies hope to support through a combination of price and quota incentives. However, in the current public information, specific adjustments to the quotas for re-lending to agriculture and small enterprises, as well as special arrangements for private entities, remain relatively limited, and the lack of sufficient transparency makes it difficult for the market to accurately assess the policy's implementation effects in advance. The actual results can only be verified by subsequent public data. Looking back at the market's consistent evaluation of structural tools, there has been controversy at the execution level: from funds being diluted in multi-layered nesting and delegated trust to banks preferring to let some preferential quotas "sit on the books" rather than actively increasing allocations to high-risk clients, these phenomena may undermine the original policy intentions. To make a more evidence-based judgment on the success or failure of this adjustment, several key indicators are worth continuous observation, including whether the financing rates and availability for small and micro enterprises and private enterprises show substantial improvement, whether the loan growth rates in key areas (such as technological innovation and green transformation) are significantly faster than the overall average, and whether banks' capital adequacy ratios and non-performing loan ratios remain within controllable ranges after taking on more targeted tasks. Only by finding a better balance between support efficiency and financial stability can structural credit easing potentially escape the dilemma of "nominal easing with discounted transmission."

After the Window Period: How Far Can Monetary Policy Go?

In summary, this round of structural rate cuts carries at least three intentions: first, to lower the costs of targeted tools like re-lending to provide more targeted "blood transfusions" for economic transformation and key areas; second, against the backdrop of a concentration of long-term deposits maturing in 2026, to create policy space for repricing on the bank's liability side, buffering the impact of declining long money rates on the liability structure; third, within the current window of relatively stable Renminbi exchange rates and the dollar entering a rate cut cycle, to release moderate easing signals while trying to avoid causing strong shocks to exchange rate expectations. Throughout this process, the central bank is dynamically balancing the three goals of "stabilizing growth, protecting the exchange rate, and ensuring the stability of financial institutions": structural tools are more of a compromise choice after weighing options, and they may serve as a potential substitute or prelude for larger-scale total adjustment tools in the future, rather than a "universal key" that can independently solve all cyclical and structural problems. For market participants, what truly needs attention is not the change in a single interest rate figure, but whether this operation will be embedded in a more complete policy combination: for example, whether there will be stronger fiscal efforts and adjustments in the pace of credit issuance, whether it will be combined with industrial policies and regulatory guidance to form more systematic support for key areas, rather than betting all expectations on marginal changes in interest rates. In an environment where domestic demand recovery and external uncertainties coexist, the next step for China's monetary policy will depend on whether it continues to add to structural tools, constantly refining the efficiency of targeted support through more precise design and execution, or whether it will be forced to resort to more symbolically significant "total tools" at some critical point in the future, based on the data from real economic operations and how policymakers redraw the lines between risk and growth.

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