Osteoarthritis (OA) is a common chronic bone and joint disease. Circular RNA is a type of non-coding RNA that forms a circular structure with covalent bonds. There is growing evidence that circRNA can function as a functional RNA and play an important role in the occurrence and development of osteoarthritis chondrocytes. However, the exact role of circRNA on OA remains to be studied. Quantificational real-time polymerase chain reaction (qRT-PCR) was used to determine the expression levels of CircPSM3 and miRNA-296-5p in OA chondrocytes. Cell proliferation was detected by the Cell Counting Kit (CCK8), and BMP2, BMP4, BMP6 and RUN2 molecular levels in OA chondrocytes were detected by qRT-PCR and Western Blot (WB). Direct targets of CircPSM3 and miRNA-296-5p in OA chondrocytes were measured by Luciferase reporter assay. CircPSM3 expression was upregulated in OA cartilage tissue and cells. Low expression of CircPSM3 promoted the proliferation and cell differentiation of OA chondrocytes. Meanwhile, miRNA-296-5p was down-regulated in OA cartilage tissue and cells. The Luciferase reporter gene showed that CircPSM3 could target miRNA-296-5p. The expression level of CircPSM3 and miRNA-296-5p showed a negative correlation. Further research found that a high expression of miRNA-296-5p could effectively promote the proliferation and cell differentiation of OA chondrocytes. Furthermore, miRNA-296-5p inhibitors reversed the effect of si-CircPSM3 on the proliferation and differentiation of OA chondrocytes, while miRNA-296-5p inhibitors enhanced the effect of si-CircPSM3 on the proliferation and differentiation of OA chondrocytes. CircPSM3 was upregulated in OA chondrocytes. CircPSM3 participated in the proliferation and differentiation of OA chondrocytes through targeted binding to miRNA-296-5p. CircPSM3 may become a potential therapeutic target for osteoarthritis treatment.