(Bloomberg) -- China withdrew cash from the banking system for a second consecutive month, signaling its caution toward monetary easing as currency depreciation pressures mount.

The People’s Bank of China drained a net 70 billion yuan ($9.7 billion) of cash via its medium-term lending facility, while holding the interest rate on its one-year policy loans at 2.5%. The operation came even after inflation stalled last month, fueling calls for more stimulus. Officials also reduced liquidity in March via the MLF for the first time since late 2022.

The authorities are facing an increasingly difficult task of managing economic risks and dealing with policy divergence from the US, where rate-cut bets are being pushed back as inflation remains sticky. Looser monetary policy can help support the economy but also exacerbate currency weakness and capital flight.

“Currency stabilization has been a policy priority over the past month,” said Lynn Song, chief greater China economist at ING Groep NV. “The economy would benefit from further monetary policy easing, as the weaker-than-expected March credit, trade and inflation data over the last week still gave a reason for caution.”

Investors have been expecting rate cuts in China this year as the world’s second-largest economy struggles with deflationary pressures and a years-long property crisis. China’s credit expansion continued to slow in March and banks extended fewer loans than expected, reflecting still-weak borrowing demand as the PBOC refrained from easing monetary policy.

Falling Exports

While parts of China’s economy have shown green shoots this year, economists say more stimulus will be needed to reach the ambitious annual growth target of around 5%. Exports fell more than economists forecast in March, dealing a blow to optimism that global demand would help drive growth.

The yuan has weakened around 2% this year despite consistent support by the authorities, as resilient US inflation damped Fed rate cut bets. Chinese officials have been vigilant about the yuan, as a falling currency can spill over to local stocks and bonds. 

Data on Tuesday is forecast to show annual economic growth slowed 4.9% in the first quarter, from 5.2% in the previous three months, according to analysts’ forecasts. 

Economists had expected the PBOC to roll over the full 170 billion yuan of MLF loans maturing, according to the median estimate of eight analysts who made forecasts about volume. 

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