Money Market Rates Raised By China As A Counter Measure To US Fed Rate Hike

Beijing has signaled that it is keeping a close watch on the movements in rate across the Pacific in the U.S. and is keen to maintain its capacity to contain capital outflow after China’s central bank increased the interbank policy rates by 5 basis points soon after a rate hike was announced by the US Federal Reserve.

It has been over two years that the benchmark deposit or saving rates of the People’s Bank of China (PBOC) have remained unchanged as a part of its “prudent” monetary policy stance and China has been putting on a brave face in the wake of multiple rate hikes in the US.

But the 28-day reverse repo rate was raised to 2.8 per cent and the seven-day reverse repo rate to 2.5 per cent on Thursday by China’s central bank. According to an online statement by the bank changes were also brought in the one-year medium-term lending facilities and raised by 5 basis points to 3.25 per cent.

In March, the PBOC had made a similar hike but by just 10 basis points in response to the rate hike by the U.S. Fed then. There was no reaction from PBOC in June when the Fed again raised rates.

China’s Thursday move was not a serious measure at enhancing rate but it borne a more symbolic look, said former PBOC economist Ma Jun.

“It sends a message to the international market that China cares about monetary policy coordination and stabilising the interest rate gap between China and the US,” Xinhua quoted Ma as saying.

By showing that the PBOC was in a position to take measures to prevent capital outflows, the rate hike also “sends a warning to overseas speculators who are trying to short the yuan”, he said.

China made mistakes in the adjustment of the yuan exchange rate which resulted in capital outflows and depreciation of the yuan in the second half of 2015 and last year. Those problems were compounded after the Fed raised rates resulting in a higher US dollar which threatened to cause more capital outflow from China.

It would have been too dramatic to enhance the deposit or lending rates and therefore the PBIC chose to change the interbank policy bank rate, said Hong Hao, chief strategist at Bocom International in Hong Kong.

“It’s hard for China to touch benchmark rates because it conveys a strong signal [of policy tightening],” Hong said. “But the move showed the government’s intention to maintain a neutral … liquidity environment.”

“The small rise in the interbank policy rate will help narrow the gap with the market rates, change market distortions and improve monetary policy mechanisms,” the PBOC said.

As t he Fed is attempting to reduce its balance sheet, the PBOC was undertaking measures as a precautionary measure, said Wu Qi, a fellow at the Beijing-based Pangoal Institution, a private think tank.

“The US tax cut in particular is starting a global competition which may weigh on China in terms of capital flight and the value of the yuan,” Wu said.

(Adapted from SCMP.com)

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