Cen­tral bank look­ing at 10 ba­sis-point in­crease in Q2, say an­a­lysts

New Straits Times - - Business - DAVID QU


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’.

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