A Study on the Impact of China's 'Gradualist' Monetary Policy on A-Share Market Liquidity and Sector Valuations

Based on the latest data and authoritative analysis, I have prepared this in-depth research report on the impact of China’s ‘Gradualist’ monetary policy on the A-share market.

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Based on signals from the 2026 People’s Bank of China (PBC) Work Conference, the central bank will continue to implement a

and explicitly proposed “flexibly and efficiently using multiple monetary policy tools such as reserve requirement ratio (RRR) cuts and interest rate cuts” [1]. Sheng Songcheng pointed out at the 2026 China Chief Economists Forum Annual Conference that the “gradualist” approach to monetary policy is highly likely, and when facing uncertainties, it is necessary to “cross the river by feeling the stones”. Moreover, monetary policy plays an indirect role and requires market cooperation [2].

Policy Tool	Expected Magnitude	Implementation Timing	Key Considerations
RRR Cut	0.5-1 percentage point (1-2 times)	First quarter may be a window	Release 500-1000 billion yuan in liquidity
Interest Rate Cut	20-50BP (2 times)	Discretionary based on economic data	Reduce financing costs for the real economy
MLF/Reverse Repo	Incremental injection	Regular operation	Maintain stable interbank funding rates
Structural Tools	Quota increase + interest rate cut	Continuous advancement	Support key sectors under the “Five Major Initiatives”

• Guan Tao, Bank of China Securities
  : There is still room for RRR and interest rate cuts, but they are not mandatory options [3]
• Ming Ming, CITIC Securities
  : A 0.5 percentage point RRR cut may be implemented in the first quarter, releasing approximately 1 trillion yuan [1]
• Goldman Sachs
  : Two 10-basis-point interest rate cuts may be implemented in 2026 [4]
• Liu Jing, HSBC
  : A 20-basis-point interest rate cut and a 50-basis-point RRR cut may be implemented [4]

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The A-share market’s liquidity has exhibited the following characteristics recently:

Indicator	Current Status	Trend
Average Daily Trading Volume	Approximately 2.9 trillion yuan (trillion-yuan level)	Remain relatively active
Margin Trading and Short Selling Balance	Slight rebound	Marginal improvement
PBC Reverse Repos	Conducted daily	Regular operation
Northbound Capital	Net inflow trend	Recovery growth

The transmission of monetary policy to A-share liquidity follows the following path:

PBC Policy Adjustments → Interbank Market Liquidity → Real Economy Credit → Capital Market Liquidity

1. Quantitative Tools (RRR Cut)
   :
   • Each 0.5 percentage point RRR cut releases approximately 500-800 billion yuan in long-term funds
   • Directly increases banks’ lendable funds and indirectly boosts expectations of incremental capital in the capital market
   • Delivers the most direct benefits to capital-intensive sectors such as banking and real estate

2. Price-Based Tools (Interest Rate Cut)
   :
   • Reduces overall social financing costs by approximately 30-50BP
   • Enhances the relative attractiveness of equity assets
   • Reduces corporate financial expenses and improves profit expectations

3. Policy Lag Effect
   :
   • Effects typically take 2-3 months to materialize
   • Market expectations may be reflected in stock prices in advance

Based on historical data and policy simulations, the impact of liquidity changes on A-share indices is as follows:

Liquidity Change	Expected Change in Shanghai Composite Index	Expected Change in ChiNext Index	Trading Volume Change
+10%	+8-12%	+12-18%	+20-30%
+5%	+3-5%	+5-8%	+10-15%
0%	0%	0%	0%
-5%	-3-5%	-5-8%	-10-15%
-10%	-8-12%	-12-18%	-20-30%

:

• The ChiNext Index is approximately 1.5 times as sensitive to liquidity as the Shanghai Composite Index
• The magnitude of trading volume change is approximately twice that of liquidity change
• Moderate, sustained liquidity easing is more beneficial to the market

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There are significant differences in the sensitivity of different sectors to monetary policy:

Sector	Monetary Sensitivity	Policy Benefit Degree	Foreign Investor Preference	Comprehensive Score	Current PE (x)
Real Estate	9	9	3	7.5	12.5
Finance	8	8	6	7.5	6.5
Cyclical	8	7	4	6.7	18.3
New Energy	7	6	7	6.7	22.8
Technology	6	5	8	6.2	45.2
Consumer	5	5	7	5.5	28.5
Pharmaceutical	4	3	6	4.2	32.1
Utilities	3	4	5	3.9	18.5

Comprehensive Score = Monetary Sensitivity × 40% + Policy Benefit Degree × 35% + Foreign Investor Preference × 25%

• RRR Cut → Broaden financing channels for real estate enterprises → Ease capital chain pressure
• Interest Rate Cut → Decline in mortgage rates → Marginal improvement on the demand side
• Valuation repair expectation: Current PE is only 12.5x, at a historical low

• Sector credit risk remains the main constraining factor
• Policy benefits are more reflected as “risk prevention” rather than “strong stimulus”
• Focus on structural opportunities for leading high-quality real estate enterprises

• RRR Cut → Improve banks’ loan-to-deposit ratio → Marginally ease net interest margin pressure
• Interest Rate Cut → Decline in asset-side returns, but deposit costs are reduced simultaneously
• Significant valuation advantage: Current PE is only 6.5x

• The high-dividend feature of bank stocks is more attractive in a low-interest rate environment
• The brokerage sector benefits from increased capital market activity
• For the insurance sector, attention should be paid to the impact of declining interest rates on investment returns

• Credit Easing → Accelerate infrastructure investment → Increase demand for raw materials
• Coordinated Fiscal Expansion → Accelerate special bond issuance → Increase physical workload

• Base metals such as copper and aluminum (new energy demand + supply contraction)
• Steel (marginal improvement in demand for construction steel)
• Chemicals (significant divergence in sub-sectors)

have low sensitivity to monetary policy, but each has its own investment logic:

Sector	Defensive Attribute	Growth Logic	Policy Independence
Utilities	High	Stable cash flow	Greatly affected by price regulation
Pharmaceutical	Medium	Innovation-driven	Dominated by medical insurance policies

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Based on the pace of monetary policy and market cycles, 2026 is divided into four phases:

┌───────────────────────────────────────────────────────────────────┐
│                    2026 Investment Strategy Clock                  │
├─────────────┬─────────────┬────────────────┬───────────────────────┤
│ Phase       │ Time Period  │ Market Feature │ Strategy Recommendation │
├─────────────┼─────────────┼────────────────┼───────────────────────┤
│ Phase 1     │ Jan-Mar     │ Policy Watch   │ Defensive focus: High-dividend + Consumer │
│ Phase 2     │ Apr-Jun     │ Policy Delivery │ Moderate overweight: Technology + New Energy │
│ Phase 3     │ Jul-Sep     │ Effect Verification │ Balanced allocation: Finance + Cyclical │
│ Phase 4     │ Oct-Dec     │ Expectation Adjustment │ Dynamic adjustment: Flexible allocation │
└─────────────┴─────────────┴────────────────┴───────────────────────┘

Allocation Type	Recommended Sectors	Rationale	Risk Level
Core Allocation	Banking, Leading Consumer Companies	High dividend, stable performance	Low
Satellite Allocation	Technology, New Energy	Policy support, growth potential	Medium-High
Tactical Allocation	Brokerage, Cyclical	Market sentiment, economic recovery	High
Risk Hedging	Gold, REITs	Safe-haven assets, alternative returns	Medium

• In an interest rate downtrend cycle, the relative attractiveness of high-dividend assets increases
• Dividend yields of financial stocks such as banks and insurance are generally 4-6%
• Regulatory authorities continue to promote dividend policies

• Dividend yield > 4%
• Stable dividends over the past three years
• Stable leading position in the sector

• AI industry chain remains booming (refer to CES 2026 as a leading indicator)
• Strengthened logic of domestic substitution
• Key support under the “Five Major Initiatives” policy

• Artificial Intelligence, Semiconductors
• High-End Equipment, New Materials
• Digital Economy, Indigenous Innovation (Xinchuang)

• Continuation of trade-in policies
• Continuous recovery of service consumption
• Normalization of consumption scenarios

• New Energy Vehicles, Home Appliances
• Catering, Tourism, Hotels
• Medical Aesthetics, Cosmetics

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Risk Type	Risk Level	Specific Description	Response Strategy
Uncertainty of Fed Policy	High	If the Fed slows its rate cut pace, it may constrain domestic easing space	Monitor exchange rate fluctuations, moderate hedging
Real Estate Risk Transmission	High	Credit risk of real estate enterprises may impact the banking system and capital market	Avoid highly leveraged real estate enterprises
Rising Inflation Expectations	Medium	If CPI rebounds beyond expectations, it may limit space for interest rate cuts	Dynamically adjust duration strategy
Renminbi Exchange Rate Pressure	Medium	Interest rate cuts may bring certain depreciation pressure	Focus on export-oriented sectors
External Market Volatility	Medium	Geopolitical risks may disturb market sentiment	Maintain portfolio flexibility

1. Interest Rate Risk Hedging
   : Appropriately allocate long-duration bonds
2. Exchange Rate Risk Hedging
   : Focus on export-oriented enterprises
3. Credit Risk Hedging
   : Avoid high-yield real estate bonds
4. Market Risk Hedging
   : Maintain moderate position size, hold cash reserves

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1. Monetary Policy Orientation
   : A moderately accommodative stance will be maintained in 2026, with the “gradualist” approach having the highest probability (60%). There is still room for RRR and interest rate cuts, but the magnitude will be limited

2. Liquidity Impact
   : Each RRR cut releases approximately 500-800 billion yuan in liquidity, providing support to the market; policy transmission lag is about 2-3 months

3. Sector Valuation Divergence
   :
   • Highly Sensitive
     : Real Estate, Finance, Cyclical (high PE repair elasticity)
   • Moderately Sensitive
     : Technology, New Energy (growth logic-driven)
   • Low Sensitive
     : Utilities, Pharmaceutical (defensive attribute-focused)

4. Investment Strategy Framework
   :
   • First half of the year: Driven by policy expectations, focus on high-dividend and technology growth
   • Second half of the year: Fundamental verification, focus on the strength of economic recovery

Scenario	Shanghai Composite Index Range	Trigger Condition
Base Case	3200-3600 points	Gradualist monetary policy + moderate economic recovery
Bull Case	3600-4000 points	Proactive easing policy + strong economic recovery
Bear Case	2800-3200 points	Policy underperformance + economic growth slowdown

: Base Case 60%, Bull Case 25%, Bear Case 15%

1. Short-Term (1-3 Months)
   : Maintain neutral position, allocate to high-dividend assets for defense
2. Medium-Term (3-6 Months)
   : Accumulate technology growth and new energy stocks on dips
3. Long-Term (6-12 Months)
   : Maintain balanced allocation, focus on verification of economic recovery

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[1] Xinhua News Agency - PBC Sets 2026 Monetary Policy Tone: “Flexible and Efficient” RRR and Interest Rate Cuts (https://www.xinhuanet.com/20260107/063a6c0ac7fb4b42bf1f2a9ff7cbd5ae/c.html)

[2] Caixin - Speech by Sheng Songcheng at the 2026 China Chief Economists Forum Annual Conference (https://finance.sina.com.cn/)

[3] Eastmoney - Chief Outlook | Guan Tao, Bank of China Securities: There is Still Room for RRR and Interest Rate Cuts in 2026 (https://fund.eastmoney.com/a/202601073610791042.html)

[4] Yantai Daily - RRR and Interest Rate Cuts Expected: PBC Clarifies Key Work Priorities for This Year (https://ytapp.jiaodong.net/system/2026/01/07/201444471.shtml)

[5] Jinling AI - A-Share Market Data and Sector Analysis (https://gilin-data.oss-cn-beijing.aliyuncs.com/)

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