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.

But the action on Wednesday was still moderate and did not cause a big disturbance in the market, as the costs of short-term borrowing were still trending downward, he noted.

On Friday, Monday and Tuesday, the PBOC injected a combined 274 billion yuan into the banking system via its regular operations after rattling traders by draining a net of 568.5 billion yuan from Tuesday to Thursday last week.

Cutting the amount of cash in the banking system was seen as particularly aggressive before the Lunar New Year holiday period, which officially begins on February 11. Ahead of the holiday, the central bank traditionally adds large sums to the banking system so banks can meet their month-end liquidity requirements, and to meet the sharp rise in demand for cash by individuals during the holiday season, when consumers typically spend large sums on travel, gifts and food.

His comments and the unusual liquidity squeeze quickly sparked speculation about a faster-than-expected reduction of coronavirus stimulus, and sent the overnight interest rate that banks use to borrow from each other to the highest level since March 2015.

“There is no doubt that liquidity has tightened marginally, and the credit growth rate has reached a turning point,” Li Xunlei, chief economist at Zhongtai Securities and an adviser to the Chinese government, wrote in a note on Tuesday.

“Policy normalisation is already an established reality,” he said. “Monetary tightening is logical, while the timing is more of a warning to the public to cool their expectations of further gains in stock and property prices, and it has obvious effects [on the market].”

Li added that there was no need to worry too much about the shift, since the country has accumulated ample liquidity, with the total assets of all commercial banks standing at 312.7 trillion yuan (US$48.4 trillion) at the end of last year, or five times the amount in 2008.

“We are now likely at a turning point for liquidity,” agreed Ren Zeping, chief economist at the Evergrande Research Institute, in a note on Monday.

Chen Yulu, vice-governor of the PBOC, reaffirmed at a press conference last month that the central bank would maintain necessary monetary support for the nation’s economic recovery.

In the latest sign that the economy still needed that support, China’s services sector activity in January grew at its slowest rate since April last year, the first month of the economic recovery, following last month’s resurgence of the coronavirus and reimposed lockdowns in several northern provinces, according to the Caixin/Markit PMI data released on Wednesday.

The return of a major outbreak, the largest since March last year, and government efforts to get workers not to travel over the Lunar New Year, are likely to weigh on consumer spending during the holiday period, and this could dramatically reduce the thirst for liquidity ahead of the holiday. This means the PBOC might not need to inject as much money into the banking system as it has in previous years, said Lu Ting, chief economist at Nomura.

“We expect the PBOC to maintain its wait-and-see approach in the near term [on the market’s need for liquidity] before resuming its gradual policy normalisation,” he wrote in a note on Tuesday.

Gavekal’s He also said the central bank is likely to ensure sufficient liquidity before the Lunar New Year by injecting funds this week and next.

“After all, the theme set by the central bank [for the provision of liquidity] is still ‘reasonable and ample’,” he said.