China ups bank rates after Fed tightener
But avoids jolting its markets
CHINA’S central bank edged borrowing costs higher after the Federal Reserve’s decision to tighten monetary policy.
Just hours after the Fed’s quarter percentage-point move, the People’s Bank of China increased the rates it charges in open-market operations and on its medium-term lending facility, though making smaller adjustments than the US central bank.
China also boosted rates on another policy tool, the standing lending facility, according to two people familiar with the matter, who asked not to be named as they’re not authorised to talk to media.
Investors took the news in their stride. Analysts said the modest moves showed that the PBOC wanted 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. 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 mid-March. The cost of funds lent via MLF was also increased by five basis points, with the 1-year rate raised to 3.25 percent. Rates on SLF borrowings with tenors from overnight to a month went up by the same amount, the people familiar said.
“This action seems to follow the Fed,” said Raymond Yeung, chief greater China economist at Australia and New Zealand Banking Group.
“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 percent of the 32 economists, analysts and traders surveyed ahead of the Fed meeting had said 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.
Tightening
Further Fed interest rate hikes will have some impact on capital flows, while the overall effect will not 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 in Shanghai on Thursday.
Recovering sentiment on the yuan, a yield gap near the widest in more than two years between US and Chinese 10-year sovereign bonds, and still-moderate inflation offer breathing room for policy makers as 2017 comes to a close. But abstaining from a rate increase may have fuelled risks of yuan depreciation, especially in an environment where a prospective US tax cut may lead to some capital repatriation.
The seven-day reverse repurchase rate is now viewed as a key policy benchmark, steering borrowing costs by creating the bottom part of a corridor. MLF rates are used to guide costs through the yield curve. The traditional one-year lending and deposit benchmark rates have been unchanged since late 2015. – Bloomberg