China, following Fed,
lifts short-term rates to steady yuan, battle debt
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[March 16, 2017]
By John Ruwitch and Winni Zhou
(Reuters) - China's central bank raised short-term interest rates on
Thursday in what economists said was a bid to stave off capital outflows
and keep the yuan currency stable after the Federal Reserve raised U.S.
The increase in rates was China's third in as many months, and came a
day after the end of the annual session of parliament where leaders
warned that tackling risks from a rapid build-up in debt would be a top
policy priority this year.
Hours earlier, the Fed raised its benchmark policy rate, as had been
widely expected, and signaled more hikes were on the way as the U.S.
economy picks up steam.
"The timing says it all. China is no longer insulated from the Fed and,
more generally, from international financial conditions," said Alicia
Garcia Herrero, chief Asia Pacific economist at Natixis.
The People's Bank of China (PBOC) has left its benchmark lending rate
unchanged since an October 2015 cut, and said specifically that
Thursday's action should not be seen as full-blown policy tightening,
like that of the Fed.
But analysts and investors believe the PBOC is increasingly using money
market rates and other policy tools as it struggles to contain financial
risks from years of debt-fueled stimulus and raise the costs for
speculators betting against the yuan.
China's banks tend to rely heavily on short-term, interbank lending,
which connect strong banks with weaker counterparts and shadowy lenders.
The PBOC has been allowing repo rates to rise since late 2016 by
adjusting the amount of funds it injects.
"The higher U.S. rates and tightening of U.S. monetary policy could
trigger further capital outflows and have some negative impact on
China's financial system," Nomura economist Yang Zhao said.
"I think they want to stabilize the currency at this time."
The PBOC also strengthened the yuan's daily mid-point reference rate by
the most in about two months on Thursday. The yuan ended the day up 0.2
But benchmark 10-year treasury futures closed at their highest in over
two months, as a big central bank cash injection calmed market jitters
after the rate rises.
Last year the yuan fell 6.5 percent against a resurgent dollar and
uncertainty over China's economy, prompting the government to clamp down
on capital outflows to ease a drain on its foreign exchange reserves.
The yuan has been largely stable this year as the dollar has paused, but
China's government has remained alert as many market watchers expect the
dollar will eventually resume its climb.
STRONGER ECONOMY GIVES POLICYMAKERS MORE ROOM
After years of super-loose policy, the PBOC has cautiously shifted to a
modest tightening bias in recent months, though it is treading
cautiously to avoid hurting growth. The economy is on steadier footing
now, giving policymakers more room.
PBOC Governor Zhou Xiaochuan said on Friday that China's corporate debt
levels are too high but stressed it will take time to bring them down to
more manageable levels.
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A Chinese national flag flutters outside the headquarters of the
People's Bank of China, the Chinese central bank, in Beijing, China
April 3, 2014. REUTERS/Petar Kujundzic/File Photo
keeping with that cautious approach, most of the increases on Thursday were a
very modest 10 basis points (bps), or a tenth of a percentage point, the same as
moves in various short- and mid-term policy instruments in January and February.
The rate on open market operation reverse repos for seven-, 14- and 28-day
tenors was bumped up for the second time in six weeks, with the seven-day rising
to 2.45 percent.
PBOC insisted the moves did not indicate a change in its monetary policy, though
some economists say the seven-day reverse repurchase rate has become a de facto
Flexibility in rates is favorable for deleveraging, "deflating bubbles" and risk
prevention, the PBOC said.
"(The market) does not need to over-interpret the amount and price of each
operation," it said. "Changes in rates are normal and do not indicate a change
in direction for monetary policy."
Economists expect further modest hikes in the seven-day rate over the course of
the year, with ANZ expecting another 20 bps rise by year-end and London-based
Capital Economics forecasting another 55 bps.
The weighted average rate for the seven-day reverse repo rose to 2.7641 percent,
from Wednesday's 2.5697 percent.
CASH INJECTIONS TO CALM THE NERVES
PBOC also raised the borrowing rate on its medium-term lending facility (MLF)
loans, with the six-month rate now 3.05 percent and the one-year at 3.20
percent, after a similar move in late January. The MLF is a supplementary policy
tool it uses to manage liquidity conditions in the banking system and money
Completing the daily triple-play, sources said the PBOC also raised rates on its
standing lending facility (SLF) short-term loans later in the day.
The rate increase for overnight SLF loans was twice that of the other
instruments at 20 bps, possibly signaling concern that very short-term funding
was still being used in riskier ways despite pledges of a crackdown. The PBOC
had no immediate comment.
The central bank also injected a large amount of fresh funds into the financial
system to maintain liquidity.
It lent 113.5 billion yuan ($16.47 billion) of six-month MLF loans and 189.5
billion yuan of one-year MLF loans to 17 financial institutions on Thursday.
Economists polled by Reuters earlier this year expected China would keep its
benchmark lending rate steady through at least the second quarter of 2018.
(Additional reporting by Elias Glenn in BEIJING; Editing by Kim Coghill)
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