Stock prices have rallied around the world thanks to unparalleled monetary support. Central bankers fear premature tightening could stunt fragile recoveries. China could be the first country bold enough to pull the plug.

In a surprise move, the People’s Bank of China withdrew about $12bn from the banking system on Tuesday. Beijing had long signalled that current monetary policy would be maintained. Short-term borrowing costs rose 32 basis points to 2.74 per cent, a rate not seen since before the pandemic. Chinese government bonds futures fell.

The sum of $12bn is just a fraction of the $500bn stimulus and liquidity the central bank has pumped into the financial system last year. The move may matter more as a declaration of intent. The Chinese authorities hope to take some of the air out of asset bubbles — notably bullish stock markets — which western peers are letting rip.

Chinese media reported that Ma Jun, a PBoC adviser, warned of asset bubble risks and suggested China scrap GDP growth targets to curb debt. China’s growth in the fourth quarter returned to pre-pandemic levels of 6.5 per cent, suggesting the worst of the epidemic is over.

Tellingly, the moves came just weeks before the mid-February Lunar New Year holiday, a peak season for travel and retail spending. Confidence among better-off Chinese has been bolstered by soaring equity values.

Further tightening would hit local stocks. Overflowing liquidity has boosted mainland China’s CSI 300 index of Shanghai- and Shenzhen-listed stocks by 56 per cent from a March low. The rally attracted record funds from foreign investors. They would be the first to leave at any signs of liquidity stress.

Fallout from US sanctions is another important course of action. MSCI is set to remove another five Chinese companies from its global equity index at the end of share trading on Wednesday. A swift reversal on sanctions by US president Joe Biden looks unlikely. The latest shift in the mood in China suggests that the best days of its equity rally have ended.

The Lex team is interested in hearing more from readers. What’s your take on the PBoC’s actions? Please tell us what you think in the comments section below.