China pushes up borrowing costs after Fed raises rate

BEIJING: China’s central bank edged borrowing costs higher in an unexpected move after the Federal Reserve’s decision to tighten monetary policy.

Hours after the Fed’s quarter percentage-point move, the People’s Bank of China (PBoC), citing market expectations, increased the rates it charges in open-market operations and on its medium-term lending facility, though making smaller adjustments than the US.

Markets took the announcement in stride. Analysts said the modest adjustment shows the PBoC wants to balance the need to tighten monetary policy with avoiding jolting its markets.

China’s rate adjustments “help markets form reasonable expectations for interest rates,” the PBoC said in a statement on its website on Thursday. It also prevents financial institutions from adding excessive leverage and expanding broad credit supply, it said.

The cost of seven-day and 28-day reverse-repurchase agreements was raised by five basis points. That followed an increase in midMarch.

The PBoC skipped the use of 14-day reverse repos yesterday. The cost of funds lent via MLF was also increased by five basis points, with the one-year rate raised to 3.25%. ”This action seems to follow the Fed,” said Raymond Yeung, chief greater China economist at Australia & New Zealand Banking Group Ltd.

“Since it only lifted the rate by just five basis points the central bank does not want to jeopardise the market with an aggressive hike. It does indicate the tightening bias of the policy makers and this stance will continue in 2018.”

More than 80% of the 32 economists, analysts and traders surveyed ahead of the Fed meeting had said that the PBoC would maintain its rates on reverse-repurchase agreements, which guide the cost of funding in financial markets. The PBoC refrained from raising borrowing costs in June after a Fed hike then.

Further Fed interest rate hikes will have some impact on capital flows, while the overall effect won’t be especially significant because China has already been tightening amid deleveraging efforts, Lillian Li, senior analyst at Moody’s Investors Service, said at a briefing Thursday in Shanghai.