China’s central bank drained a record 890 billion yuan ($129 billion) from its financial system in March, the first net repayment of commercial bank loans since May, signaling caution amid soaring oil prices. This abrupt reversal from months of liquidity buildup follows China’s economic rebound post-Covid, as the war in Iran pushes oil costs higher and risks deflation. Policymakers aim to 'save bullets' for future stimulus needs, wary of flooding the interbank market where borrowing costs remain steady at 1.3%.

While other central banks raise rates, the PBOC maintains a 'moderately loose' stance, leaning on fiscal policy. Analysts adjust rate-cut timelines, noting the OECD now forecasts higher global inflation. The PBOC stresses policy signals should be read from interest rates, not liquidity levels, though its balance sheet data due in April will clarify the full impact. Despite the liquidity drain, government bond purchases resumed at modest levels.

The pullback reflects a trickier policy path: stronger-than-expected growth reduced stimulus urgency, and trade held up despite the Iran conflict. Economists anticipate possible RRR cuts and bond purchases, but the PBOC remains cautious until domestic demand improves, keeping financing costs low for government spending.