Central bank moves to stabilize market after US rate hike shock

China’s central bank injected more liquidity into the domestic market on Friday, in an apparent bid to stabilize the market after a turbulent day in the Chinese foreign exchange and bond markets driven by an interest rate hike in the US.

The People’s Bank of China (PBC) injected a total of 394 billion yuan into the market through 19 domestic financial institutions using its medium-term lending facility (MLF). MLF is a common practice adopted by the PBC to inject money into the market.

The PBC said the move was to meet the liquidity demands of Chinese banks, and asked top financial institutions to “take responsibility in implementing monetary policies and stabilizing the market,” ifeng.com reported, citing market insiders.

The central bank also gave domestic banks “window guidance,” requesting that they refrain from scaling back fundraising for non-banking institutions, the report said, adding such a move is commonly viewed by the market as a stabilizing measure after the foreign exchange, stock and bond markets experienced turmoil the previous day.

On Thursday, while the stock market had only a mild reaction to the US interest rate hike, the sovereign bond market had a dramatic day, with the 5-year and 10-year bond yields at one point reaching their lowest levels on record.

The yuan also declined sharply against the US dollar on Thursday, as the PBC lowered the midpoint rate for the yuan to 6.9289 per dollar, the lowest level in more than eight years.

The Chinese market appeared to be stabilizing on Friday, with the 5-year and 10-year bond yields rebounding and the Shanghai and Shenzhen bourses closing up 0.17 percent and 0.77 percent respectively.

But the yuan continued to devalue against the dollar on Friday after the PBC set the midpoint 219 points lower than the previous day to 6.9508, the lowest level since May 2008.

In a series of articles published on Friday, the Xinhua News Agency said while the US interest rate hike will not significantly change the economic situation in China, including the stock market and housing market, China needs to improve its economy regardless of the measures taken by the US.

But Xinhua warned that the US rate hike will present greater risks for the global financial market that will also impact China.