ING expects China’s inflation trends to have limited effect on People’s Bank of China policy in 2026. It anticipates the inflation target announced at the Two Sessions in March will be about 2% year-on-year, unchanged from 2025.
ING forecasts CPI inflation will again come in below the 2% target, as it has in recent years. It notes the target has historically aimed to cap inflation on the upside rather than push it up from low levels.
Inflation Target Likely Not A Constraint
Based on this, ING expects CPI undershooting the target will not restrain monetary policy choices. It says the PBOC is more likely to focus on wider macroeconomic conditions and possible effects on banks and markets.
ING also points to soft domestic indicators in recent months as supporting more policy easing. It expects room for a first move in the first half of 2026, including a 10bp rate cut and a 50bp Reserve Requirement Ratio cut.
With Chinese inflation expected to undershoot its 2% target again, we see limited constraints on monetary policy. Data showing the economy’s soft finish to 2025, combined with a recent January CPI reading of just 0.4%, reinforces the case for the People’s Bank of China to ease. We should watch the upcoming Two Sessions in March for confirmation of economic targets, but the direction seems set for more support.
This outlook suggests a constructive environment for Chinese equities, which faced a difficult year in 2025. Traders might consider buying call options on key stock indices like the FTSE China A50 or Hang Seng Index. This strategy positions for a potential rebound fueled by an injection of liquidity in the first half of the year.
Potential Trades Around Policy Easing
A rate cut would likely place downward pressure on the yuan. We expect the USD/CNY exchange rate to move higher as the interest rate differential between China and the US widens. This makes buying call options on USD/CNY an attractive way to position for a weaker yuan in the coming weeks.
For those trading interest rates, the potential for both a 10bp rate cut and a 50bp RRR cut points towards being long government bonds. This can be expressed by buying Chinese government bond futures. We saw a similar sharp rally in bond prices after the RRR was last cut in mid-2025, rewarding those who were positioned ahead of time.
The anticipation of a policy move itself could increase short-term volatility. This suggests that options straddles on currency or equity indices could be used to trade the expected rise in market choppiness leading into key PBOC announcements. Remember that implied volatility often falls sharply once the actual policy decision is made public.
