China's Mini Tightening Aimed at Soothing Markets, Analysts Say

(Bloomberg) -- China’s decision to follow the Federal Reserve with a five basis point increase in borrowing costs shows the central bank is seeking to balance the need to tighten monetary policy with avoiding jolting its markets, according to analysts.

The People’s Bank of China raised the rates it charges in open-market operations and on its medium-term lending facility on Thursday, hours after the Federal Reserve hiked. The central bank also injected a net 101 billion yuan ($15 billion) through the MLF -- a signal to some observers that officials are seeking to limit any impact from the higher rates.

The PBOC’s seven-day reverse repurchase rate has lagged behind the interbank rate this year amid a deleveraging campaign -- another reason for the authorities to narrow the gap. The yield on 10-year government debt fell one basis point to 3.93 percent at 11:39 a.m. local time, while the benchmark Shanghai Composite Index was down 0.2 percent, suggesting little concern in the markets.

Westpac (Frances Cheung, head of Asia macro strategy)

  • The PBOC more than rolls over the maturing MLF, suggesting that it does not want to tighten across the board and would like to calm the market with liquidity provision
  • With hindsight, arguably the reserve repos are just catching up with money market rates
  • The intention may be to send a message that authorities do and market participants should pay attention to the external environment, not only focusing on own onshore market

Mizuho Bank (Ken Cheung, senior FX strategist)

  • The hikes represent both the market supply-demand dynamics and reaction to the Fed’s rate hike
  • This suggests that the PBOC’s intention to balance the risk of over-tightening amid the deleveraging process

Founder Securities (Yang Weixiao, chief fixed income analyst)

  • The hike seems to be more about following market interest rates, which are already higher, but the timing is very interesting, showing the PBOC still has considerations over external environment
  • It’s worth noting the central bank granted a lot more MLF than what’s due, indicating its intention to smooth jitters in the bond market following the rout

Minsheng Bank (Wang Yifeng, researcher)

  • PBOC is adopting multiple measures to stabilize potential short-term impact of a Fed hike on China
  • The combination of policies has reserved enough space for future policy changes and at the same time trying to maintain some independence over monetary policies
  • Raising reverse-repurchase and MLF interest rates too much could bring unnecessary impact on the market

Industrial Bank (Lu Zhengwei, chief economist)

  • Domestic priorities especially deleveraging are still the major consideration for monetary policy
  • Merely raising by 5bps indicates the authorities’ considerations over already high borrowing costs
  • The rates hike is to control macro leverage ratio and try to curb the usual credit surge at the beginning of a new year

Guotai Junan Securities (Qin Han, chief bond analyst)

  • This is good news for bonds, as it could be interpreted by the investors as a signal that the policy makers do not want to worsen the recent selloff in bonds and stocks, and the authorities may refrain from tightening monetary policy and toughening financial regulations too quickly
  • Deleveraging is a long-term goal -- the government won’t do it in a sprint

OCBC (Tommy Xie, economist)

  • It shows that Fed policy is still one of the parameters to affect PBOC decision making, and it shows China’s continuous efforts in financial deleveraging despite a volatile bond market.
  • The compromised rate hike probably shows the policy makers are less concerned about currency value

Beijing StarRock Investment Management (Liu Ke, chief strategist)

  • Today’s arrangement, including both large amount of MLF rollover and rate hikes, is a good illustration of the PBOC’s new “double pillar” system, which includes both monetary policies and macro prudential management
  • There’s little chance to see changes in benchmark deposit and lending rates

©2017 Bloomberg L.P.

With assistance from Helen Sun, Tian Chen, Yinan Zhao, Xize Kang

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