China's central bank moved earlier this week to drain liquidity from the market for the first time in eight months, leading to speculation over whether the world's second largest economy has embarked on a tightening cycle.
"The very fact that the PBOC (People's Bank of China) conducted the draining operation is a hawkish signal. Clearly, the central bank is trying to send a message that it will not tolerate too easy liquidity conditions," Dariusz Kowalczyk, senior economist and strategist, at Credit Agricole CIB said.
The PBOC let a net $145.89 billion drain from the interbank market this week and returned to using longer-term forward repos to drain funds, instead of reverse repos which inject funds, for the first time since June. This spooked investors and led to a 3 percent fall in China's benchmark index on Thursday, with the Shanghai Composite opening lower on Friday as well.
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