BEIJING: China’s central bank withdrew cash from its financial system for the first time in a year, a cautious signal that keeps its policy options open as higher oil prices filter through the economy.
The People’s Bank of China (PBoC) drained a total of 890 billion yuan worth of liquidity via short-term open market operations in March and soaked up another 250 billion yuan through longer-term tools, including outright reverse repurchase agreements and medium-term lending facilities.
Taken together, commercial banks likely recorded their first net repayment of PBoC loans since last May, according to Bloomberg calculations based on official data.
The withdrawal marks an abrupt reversal from months of a buildup in liquidity, when officials steered the world’s second-biggest economy through its steepest slowdown since the reopening from Covid-19 lockdowns in late 2022.
But with growth rebounding to start the year, the PBoC turned more vigilant, especially as the war in Iran sent oil prices soaring and brought China closer to exiting its record deflation.
Policymakers want to “save bullets for the future when more injections are needed,” said Lynn Song, chief economist for Greater China at ING Bank.
“It shows the PBoC doesn’t want to further flood the interbank market, as the liquidity is already quite ample.”
As higher prices ripple through the economy, a growing number of analysts have pushed back their predictions for China’s next cut to interest rates and banks’ required reserves.
While the PBoC is unlikely to tighten monetary policy just yet, it may become more wary of adding stimulus at a time when external uncertainties remain high.
By contrast, other global central banks are preparing to raise rates or have done so already.
The Organisation for Economic Co-operation and Development increased its inflation forecasts for major economies in late March and now sees the average rate for the Group of 20 this year jumping to 4%, rather than the 2.8% it predicted in December.
The PBoC has stressed in recent years that the market should read its policy signals from the level of interest rates instead of the amount of liquidity it injects, as it seeks to shift toward a more effective way of managing the economy.
Overnight interbank borrowing costs have remained steady at around 1.3% despite thinner liquidity, indicating little change to monetary conditions.
The PBoC describes its stance as “moderately loose”, with officials leaning more on fiscal policy to power growth.
The extent of the liquidity withdrawal will become more clear in mid-April, when the central bank is due to disclose its balance sheet data.
Furthermore, PBoC’s “claims on other depository corporations” – a gauge of its lending to commercial banks – had grown for nine straight months through February.
Apart from the short-and longer-term liquidity tools, the measure also includes the PBoC’s structural monetary policy instruments that encourage bank lending to targeted areas.
That tends to fluctuate much less on a monthly basis.
Offsetting the drain of money from the economy, the PBoC resumed government bond purchases in October. — Bloomberg
