China's Central Bank Raises Some Key Short-Term Interest Rates -- Update
By Shen Hong
SHANGHAI--China raised a suite of key short-term interest rates for the second time since late January, just hours after the Federal Reserve's latest monetary tightening, reinforcing Beijing's perceived policy priority to boost its currency's appeal and cool domestic asset inflation.
The unprecedented, nearly simultaneous rate increase following the Fed's decision betrays Beijing's sense of urgency to prevent capital outflows from accelerating. It also shows Beijing's desire to keep risks in its financial system from generating crises in a weak economy, analysts say.
The unexpectedly close gap between the two central banks' moves also offers a fresh indication of just how intertwined policy-making in the world's two largest economies has become.
Minutes before domestic financial markets opened, the People's Bank of China announced that it has raised the interest rates it charges commercial banks in the money market on the seven-day, 14-day and 28-day loans each by 0.1 percentage point. These rates are also known as reverse repurchase agreements, or repos.
As a result, the central bank pushed the benchmark seven-day repo rate to 2.45% from 2.35%. That followed an identical move on Feb. 3, after the PBOC had kept the borrowing cost unchanged since October 2015.
Separately, the PBOC also raised the interest rate by 0.1 percentage point on a form of special loans to 22 financial institutions known as a medium-term lending facility, for the second time since Jan. 24.
In a statement explaining the moves, the PBOC said the rate increases reflect "strengthening market expectations" for higher funding costs in light of a recovering Chinese economy and the Federal Reserve's recent rate increases.
"Besides the tough task of cutting leverage in the economy, the PBOC's decision also reflects a hope to keep the interest rate gap between China and the U.S. at an appropriate level, so as to avoid pressure on the yuan and capital flows," said Liu Dongliang, senior economist at China Merchants Bank.
Since the country's worst stock market crash in 2015, Chinese leaders have repeatedly vowed to rein in debt-fueled speculative investment that has inflated prices in the past year for everything from bonds to iron ore and garlic, risks that could wreak havoc in the economy in the long run.
While most investors had anticipated a catch-up move by Beijing following the latest Fed hike, many didn't expect it to be so soon.
"It was a surprise to me. I thought the post-Fed rallies on Wall Street and in U.S. Treasurys would mean the PBOC could afford to wait a big longer," said the Shanghai-based head of bond trading at an Asian bank.
But to others, global markets' positive reaction overnight actually provided a perfect opportunity for China's central bank to pull the trigger.
"It would have certainly been a disaster if the PBOC had raised rates during a market selloff," said Zhu Chaoping, China economist at UOB Kay Hian Holdings Ltd., a Singapore investment bank.
In addition, the likelihood of Chinese markets joining the global rally might have made the PBOC concerned that if it didn't act fast enough, its key policy message of reducing corporate and economic leverage might not be taken seriously enough, Mr. Zhu added.
Chinese markets jumped on the bandwagon indeed: the Shanghai stock market was up 0.7% at midday, while the yield on the 10-year government bonds fell 4.47 basis points at 3.31%. The yuan also rose against the dollar to 6.8949 from Wednesday's close of 6.9135.
However, in a seemingly contradictory gesture, the PBOC stressed that its latest rate increases don't amount to a formal interest-rate hike, which in China is defined only as raising the official deposit and lending rates.
"There are many tools in the central bank's toolbox. There's no need to read too much into the size and price of each (money market) operation," the PBOC said in the statement.
Analysts say this reflects the PBOC's ultimate dilemma: while it intends to use higher interest rates to cool a debt-fueled investment boom, aggressive monetary tightening is the last thing a slowing economy needs.
That is why Beijing has demonstrated a growing preference for using short-term measures, such as adjusting money-market rates, rather than blunter instruments such as policy interest rates to help achieve its various goals.
"It's mission impossible but the central bank doesn't have a choice," Mr. Zhu said.
Write to Shen Hong at [email protected]