PBOC SEEN EYEING 2 HIKES THIS YEAR
Central bank looking at 10 basis-point increase in Q2, say analysts
CHINA’S central bank will keep a tight rein on money-market rates this year, raising the cost of short-term funds at least twice in moves that will pressure bonds.
That’s the consensus view in a survey of 29 fixedincome traders and analysts, with 20 saying that the People’s Bank of China (PBoC) will increase open-market operation rates by 10 basis points in the second quarter itself.
Government bonds will drop for the third quarter in a row in the April-June period, according to the March 24-27 poll. That would be the longest run of losses in six years.
China’s policymakers are walking a fine line between driving money rates higher to reduce leverage in the financial system and preventing a cash crunch. They have already raised the cost of reverserepurchase agreements twice this year, while benchmark interest rates have been on hold since 2015.
A separate survey predicted that the PBoC will keep both benchmark borrowing costs and bank reserve-requirement ratios unchanged throughout the year.
“China is far from the end of efforts to squeeze out bubbles in the financial system,” said David Qu, a markets economist at Australia & New Zealand Banking Group Ltd, here. “The PBoC will to some extent follow the United States Federal Reserve (Fed) in tightening to keep the rate gap largely steady.”
The overnight repo rate on the Shanghai Stock Exchange jumped as much as 19.77 percentage points to 30.10 per cent, the highest level since December 27. The benchmark Shanghai Composite Index declined 1.2 per cent as of 2.25pm local time, heading for the biggest drop in more than three months.
The PBoC kicked off its latest tightening cycle in August after broad monetary loosening helped fuel an unprecedented, 11quarter bond rally. The central bank resorted to injecting longer-term funds in open-market operations, and raising the cost of loans to commercial lenders.
On March 16, while explaining the rationale for its latest openmarket borrowing cost increase after a Fed hike, the PBoC said higher rates would help offset a drop in real interest rates and maintain a yield advantage over the US.
PBoC governor Zhou Xiaochuan said during the National People’s Congress earlier this month that taming the credit binge would be a “medium-term process”. At the Boao forum held over the weekend, he said one of the priorities in China’s structural reforms in the short- and medium-term was lowering leverage.
“The funding market will become more volatile in the second quarter and there will be more frequent hiccups,” said Yan Yan, the head of fixed-income trading at China Guangfa Bank Co, here. “The pivotal level of funding costs will rise further.” Bloomberg
The PBoC (People’s Bank of China) will to some extent follow the United States Federal Reserve in tightening to keep the rate gap largely steady.”
The People’s Bank of China governor Zhou Xiaochuan has said that taming the credit binge will be a ‘medium-term process’.