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 drained a total of 890bn yuan ($129bn) worth of liquidity via short-term open market operations in March and soaked up another 250bn yuan through longer-term tools including outright reverse repurchase agreements and medium-term lending facility.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 lockdowns in late 2022. But with growth rebounding to start the year, the PBOC turned more vigilant, especially as the war in Iran sends oil prices soaring and brings 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 OECD 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. The 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. While that injects cash into the interbank market, the amount of purchases has been no larger than 100bn yuan a month.Combining all liquidity tools, the PBOC net drained over 810bn yuan worth of liquidity in March, according to an official statement published on Thursday.Apart from the spike in oil prices, the PBOC’s policy path has grown trickier after a better-than-expected growth pickup in 2026 reduced the urgency for further stimulus. Trade and manufacturing held up in March even after the Iran war broke out, indicating the economy has so far been spared the deep damage afflicting other countries.Some economists still say cuts to rates and the reserve requirement ratio are possible this year. In the past, the PBOC has taken those easing steps when producer inflation failed to pass through to consumers, resulting in narrower profit margins.“We anticipate further liquidity support from the PBOC, including RRR cuts and secondary-market purchases of China government bonds,” said Serena Zhou, senior China economist at Mizuho Securities in Hong Kong. She expects two 10-basis-point rate cuts this quarter and next.Following the first quarterly meeting of its monetary policy committee, China’s central bank reaffirmed its current policy stance, while acknowledging the economy is facing “external shocks.”Still, the PBOC will likely maintain an accommodative stance until domestic consumer and business demand sees substantial improvement. It also needs to keep financing costs low in order to help the government sell more bonds to support public spending.
Friday, April 03, 2026
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Daily Newspaper published by GPPC Doha, Qatar.
