If Fed raises rates, China
likely to follow with more modest move - traders
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[June 12, 2017]
By Winni Zhou and Andrew Galbraith
(Reuters) - A small majority of traders in China's financial markets
think its central bank will likely raise short-term interest rates this
week if the U.S. Federal Reserve hikes its key policy rate, as widely
expected, according to a Reuters poll.
The People's Bank of China (PBOC) surprised markets in mid-March by
raising short- and medium-term interbank rates hours after the Fed
raised overnight borrowing costs.
The move prompted some analysts to speculate the PBOC had decided to
"synch" its moves with those of the U.S. central bank in a bid to reduce
persistent depreciation pressure on the yuan currency against the dollar
and discourage capital outflows.
It also dovetailed with China's pledges to tackle risks from an
explosive rise in debt.
Six out of 10 traders in China's money, forex and bond markets asked by
Reuters said they believed China would move rates up if the Fed did so.
But the size of the move would be more modest, and it would likely be
confined to rates on open market operations (OMOs), the traders said.
They did not expect a hike in China's benchmark lending rate, which has
been unchanged for nearly two years.
The Fed is expected to increase interest rates by another 25 basis
points at its June 13-14 meeting.
Several increases by the PBOC earlier this year were mainly of 10 basis
points, and traders expected any move this week to be of a similar
Chinese stocks rose modestly after the Fed's March rate increase, which
was seen as increasing investors' risk appetite. There was little
reaction in Chinese forex and money markets.
"There are huge discrepancies between the benchmark OMO rates and market
rates. A slight upward movement would be quite normal," said a
Shenzhen-based trader at a Chinese bank.
She said any impact from higher market rates would not quickly filter
through into the real economy, though most analysts believe slowly
tightening credit and higher financing costs will begin to drag on
broader activity in coming months.
However, four of the 10 traders said they did not think a PBOC rate rise
was on the cards this week.
They argued monetary policy is already tightening as Beijing presses
ahead with its "deleveraging" campaign to contain and reduce risks in
the financial system, and as banks grow more cautious about lending as
they prepare for a rigorous quarterly inspection of their books by the
[to top of second column]
A staff member walks in
front of the headquarters of the People's Bank of China (PBOC), the
central bank, in Beijing, June 25, 2013. REUTERS/Jason Lee/File
one-month Shanghai Interbank Offered Rate (SHIBOR) <SHICNY1MD=> has risen to its
highest since April 2015.
mid-year timeframe is already relatively sensitive, and add to that short-term
rates are already not low. To raise rates further would put a lot of pressure on
the market," said a trader at a regional bank.
"If they really insist on following (the Fed funds rate) higher, the timeframe
will probably be pushed back."
Uncertainty over policy has also increased after sharp, sudden gains in the yuan
in recent weeks, which some analysts believe were engineered by the PBOC as a
pre-emptive buffer to flush out short sellers ahead of the expected Fed hike and
dampen any resulting depreciation pressure.
Market players were split on whether the central bank would raise rates on its
medium-term lending facility (MLF). The PBOC has been lending at longer
maturities, which has increased borrowing costs for banks.
trader at a major Chinese bank said if the central bank decided to raise the OMO
rate, it would likely wait to increase the MLF until July when it is likely to
renew maturing MLF loans.
June is traditionally a tense month for liquidity in the financial system, as
companies pay taxes and banks scramble for funds to meet a quarterly health
Analysts say while the PBOC has taken some steps to clarify its intentions, it
remains vague in telegraphing rate moves.
"Banks want to know what their cost of funding is going to be, so that
volatility isn't great in terms of managing their business and liquidity," said
Julian Evans-Pritchard, China economist at Capital Economics.
Central bank governor Zhou Xiaochuan has been historically reluctant to reveal
too much about the PBOC's strategies, even likening the bank in an interview
with Caixin last year to a chess player unwilling to reveal tricks to an
(Writing by John Ruwitch; Editing by Kim Coghill)
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