China raises market rates to fend off financial risks; growth moderates

Beijing

CHINA'S central bank on Thursday nudged up money market rates as authorities sought to defuse financial risks without imperilling the economy, a balancing act that they have managed successfully so far this year as activity remained broadly steady.

The world's second-biggest economy has started to cool in recent months amid a government crackdown on high-risk lending and polluting factories, and the move by the People's Bank of China (PBOC) - coming hours after an anticipated US Federal Reverse rate hike - signalled that Beijing will keep policy tighter next year.

A flurry of data during the day highlighted the economic impact of government efforts to wean China off its years-long addiction to debt, with industrial output, investment and property market all backing evidence of a moderation in momentum.

Analysts said the PBOC rate hikes, widely seen as a backdoor approach that avoids the need to raise benchmark policy rates, will not impede activity, though they signalled a commitment by authorities to continue curbing leverage.

"It's more a symbolic move which helps stabilise market expectations after the Fed rate hike," said Wen Bin, an economist at Minsheng Bank in Beijing.

He noted that the gap between 10-year US and Chinese bond yields has widened to 160 basis points, so the 5 bps rise will not put any pressure on the yuan, which slumped in 2016 before recovering this year after authorities slapped a range of capital control measures.

"They want to narrow the gap between operating interest rates and market interest rates for financial institutions, otherwise it could give financial institutions the wrong impression and lead to arbitrage and an increase in leverage." The PBOC increased rates on reverse repurchase agreements, or reverse repos, used for open market operations by 5 basis points for the 7-day and 28-day tenors. It increased rates on its one-year medium-term lending facility (MLF) also by 5 basis points.

Also on Thursday, the PBOC raised interest rates on its standing lending facility (SLF) short-term loans by 5 basis points, sources with direct knowledge of the matter said.

A trader at an asset management firm in Shanghai said that the yield on 10-year Chinese government bonds fell 2-3 basis points after the PBOC's announcement, as some had expected a bigger move. However, he expects the broader trend of higher yields will continue amid the ongoing campaign to reduce financial risk.

It was the first rate increase by the Chinese central bank since March, but market interest rates have risen on their own in the interim as the government pursued a range of policies to lower debt in the economy.REUTERS

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