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PBOC raises market borrowing costs in surprise move after Fed

[BEIJING] China's central bank unexpectedly raised borrowing costs following the Federal Reserve's decision to tighten monetary policy.

Hours after the Fed's quarter percentage-point move, the People's Bank of China increased the rates it charges in open-market operations and on its medium-term lending facility, though making smaller adjustments than its US peer.

The cost of seven-day and 28-day reverse-repurchase agreements was raised by five basis points. That followed an increase in mid-March. The PBOC skipped the use of 14-day reverse repos Thursday. The cost of funds lent via MLF was also increased by five basis points, with the one-year rate raised to 3.25 per cent.

"This action seems to follow the Fed," said Raymond Yeung, chief greater China economist at Australia & New Zealand Banking Group. "Since it only lifted the rate by just five basis points the central bank does not want to jeopardise the market with an aggressive hike. It does indicate the tightening bias of the policy makers and this stance will continue in 2018."

More than 80 per cent of the 32 economists, analysts and traders surveyed ahead of the Fed meeting had said that the PBOC would maintain its rates on reverse-repurchase agreements, which guide the cost of funding in financial markets. The PBOC refrained from raising borrowing costs in June after a Fed hike then.

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China's rate adjustments "help markets form reasonable expectations for interest rates," the PBOC said in a statement on its website on Thursday. It also prevents financial institutions from adding excessive leverage and expanding broad credit supply, it said.

Further Fed interest rate hikes will have some impact on capital flows, while the overall effect won't be especially significant because China has already been tightening amid deleveraging efforts, Lillian Li, senior analyst at Moody's Investors Service, said at a briefing Thursday in Shanghai.

Recovering sentiment on the yuan, a yield gap near the widest in more than two years between US and Chinese 10-year sovereign bonds, and still-moderate inflation offer breathing room for policy makers as 2017 comes to a close. But abstaining from a rate increase may have fueled risks of yuan depreciation, especially in an environment where a prospective US tax cut may lead to some capital repatriation.

The seven-day reverse repurchase rate is now viewed as a key policy benchmark, steering borrowing costs by creating the bottom part of a corridor. MLF rates are used to guide costs through the yield curve. The traditional one-year lending and deposit benchmark rates have been unchanged since late 2015.

Sun Guofeng, director of the PBOC's financial research institute, said in a recent speech that emerging market economies should also start monetary policy normalisation and exit the easing measures that were put into place to address the global financial crisis.


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