China stands pat on rates after Fed lifts benchmark

The People's Bank of China headquarters in Beijing on Jan 19, 2016.
The People's Bank of China headquarters in Beijing on Jan 19, 2016. PHOTO: REUTERS

SHANGHAI (REUTERS) - China's central bank left interest rates for open market operations unchanged on Thursday (June 15), despite its US counterpart increasing its key policy rate overnight.

The People's Bank of China (PBOC) did not explain its rationale for keeping rates unchanged, but the yuan currency is on steadier footing and domestic liquidity conditions are much tighter than they were in mid-March, when it followed a Fed hike within hours.

Markets had been divided over whether the PBOC would raise short-term rates again in lockstep with the Fed, with those in the "hold" camp noting that China's short-term money rates and bond yields had already been trending higher.

Earlier on Thursday, the PBOC injected a net 90 billion yuan (S$18.24 billion) into the financial system via open market operations, saying it was doing so to counter "liquidity stress" from seasonal tax payments and maturing reverse repurchase agreements.

The rate for seven-day reverse repos remained at 2.45 per cent, the 14-day tenor at 2.60 per cent and the 28-day tenor at 2.75 per cent, the PBOC said in a statement on its website.

China's benchmark one-year lending and deposit rates have remained unchanged since October 2015.

Encouraged by improving economic growth, China had already nudged up short-term rates several times earlier this year as part of a broader push to reduce risks and leverage in the financial system after years of debt-fuelled stimulus.

Those rate moves, while modest, were accompanied by regulatory crackdowns on riskier forms of financing and shadow banking, tightening credit conditions and resulting in China's bond curve inverting in recent months.

One key game changer in recent weeks may have been a sharp reversal in market expectations for further depreciation in the yuan and capital outflows, after China moved aggressively in May to flush out speculative bets against the currency and allowed it to jump sharply against the dUS ollar.

"There've been a lot of pre-emptive moves by the PBOC and regulators to kind of more balance exchange rate expectations in recent months, and so I think really China had done a lot of preparation ahead of the FOMC rate hike that was widely anticipated anyway," said Nomura economist Rob Subbaraman.

The yuan is now up 2.3 per cent so far in 2017 - with nearly half of that seen in recent weeks - after tumbling 6.5 per cent last year.

China's efforts to clamp down on capital outflows - a pressing concern earlier in the year - also appear to be holding up. Last week, the government reported that foreign exchange reserves rose more than expected in May.

A more sluggish outlook for the dollar has also helped take pressure off the yuan this year, after a sharp rally in the greenback in 2016.

One foreign exchange trader believed that China also refrained from raising rates on Thursday because it did not want to establish a pattern of following the Fed.

The PBOC is also keeping a close eye on seasonal liquidity tightness, and has moved to inject large amounts of funds to ease worries about another cash crunch like that in June 2013, when sent money market rates skyrocketing.

The one-year Shanghai Interbank Offered Rate (SHIBOR) has climbed to two-year highs and is currently at 4.42 per cent, above the PBOC's official lending rate of 4.35 per cent.

The weighted average for the 7-day reverse repo was at 2.7921 per cent at 0230 GMT on Thursday - more than 30 basis points above the rate as fixed by the central bank.