China Keeps Borrowing Costs on Hold for Now Following Fed Hike

(Bloomberg) -- China’s central bank on Thursday refrained from immediately following the Federal Reserve in raising borrowing costs.

The People’s Bank of China had been widely anticipated to react to the U.S. hike by lifting the cost of reverse-repurchase agreements for the second time this year, following three increases in 2017.

“It appears the PBOC decided that growth is slowing and inflation is low and well below target, while money market rates are relatively high so they don’t want to boost them further,” said Dariusz Kowalczyk, senior emerging-market strategist at Credit Agricole SA in Hong Kong.

Chinese equities were boosted by the news. The Shanghai Composite Index erased a loss of 0.5 percent to rise 0.3 percent, while the ChiNext gauge of small caps and tech stocks led gains, climbing 0.9 percent. Government bond futures also rallied, with the most active 10-year contracts spiking 0.45 percent, the most since April 18 -- the day after the PBOC cut reserve requirement ratio. The yield on sovereign notes due in a decade was little changed at 3.68 percent as of 10:10 a.m. in Shanghai.

China has been trying to ensure liquidity supply to cushion any economic slowdown and help lenders meet repayment obligations. It boosted injections via Medium-term Lending Facility last week to the most in more than a year to support smaller firms, while in April it cut the RRR by 1 percentage point, citing a similar goal. The central bank hasn’t changed the benchmark one-year lending rate since October 2015.

©2018 Bloomberg L.P.