China’s monetary tightening seen as a ‘warning to public’ to cool market expectations ahead of Lunar New Year

People’s Bank of China makes ‘moderate’ withdrawal of 80 billion yuan (US$12.38 billion) in net liquidity via its open market operations on Wednesday

Central bank traditionally adds large sums to banking system before Lunar New Year so banks can meet rise in demand for cash during peak spending season

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The Chinese central bank’s move to cut the amount of cash in the banking system recently was seen as particularly aggressive ahead of the Lunar New Year holiday period. Photo: EPA-EFE

Published: 7:09pm, 3 Feb 2021Updated: 10:08am, 4 Feb 2021

China’s central bank has once again drained money from the financial system in the midst of market concerns that its stimulative monetary policy has reached a “turning point” in the face of weakening economic data due to fresh coronavirus outbreaks.

Even though the world’s other major economies, particularly the United States, are mulling new stimulus packages to combat the economic damage caused by the pandemic, Beijing has been considering fine-tuning some of its temporary support policies enacted last year. This comes amid growing fears among some policymakers that excess liquidity might lead to asset bubbles, which would increase already high debt levels and pose risks to the financial system.

Many analysts have argued that it is too soon to start such a policy shift, since the recent resurgence of domestic infections has undermined the already uneven recovery of the Chinese economy. The fragile nature of the recovery was highlighted by the sharp decline in official and private sector purchasing managers’ indices (PMI) data this week.

Still, the People’s Bank of China (PBOC) withdrew 80 billion yuan (US$12.38 billion) in net liquidity via its open market operations on Wednesday, ending a string of currency injections during the previous three working days.

“The central bank certainly doesn’t want to signal a too-loose policy,” said He Wei, a China economist at Beijing-based research firm Gavekal Dragonomics.

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