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China stands pat on rates this time after Fed lifts benchmark

Reuters  |  SHANGHAI 

By John Ruwitch and Winni Zhou

(Reuters) - China's central left interest for open market operations unchanged on Thursday, shrugging off an overnight increase in the U.S. Federal Reserve's key policy rate.

The People's of (PBOC) did not explain its rationale for keeping unchanged, but the yuan 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 again in lockstep with the Fed, with those in the "hold" camp noting that China's short-term money and bond yields have already been trending higher.

Earlier on Thursday, the PBOC injected a net 90 billion yuan ($13.25 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 remained at 2.45 percent, the 14-day tenor at 2.60 percent and the 28-day tenor at 2.75 percent, the PBOC said in a statement on its website.

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

Encouraged by improving economic growth, had already nudged up short-term 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.

If sustained, rising funding costs are expected to translate into higher borrowing costs eventually, dragging on China's economic growth. Some companies are already reporting higher financing costs while banks are raising mortgage

But a slew of data over the past week showed the has been largely resilient to tightening so far, with solid industrial output, retail sales and exports cushioning the impact of cooling investment.

Regulatory curbs so far also have been largely aimed at lending between banks and other financial institutions.


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 moved aggressively in May to flush out speculative bets against the currency and allowed it to jump sharply against the dollar.

"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 had done a lot of preparation ahead of the FOMC that was widely anticipated anyway," said Nomura economist Rob Subbaraman.

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

While a narrower differential with the U.S. should pressure the yuan, it was little changed in spot trade on Thursday at 6.7939 per dollar by midday.

"The domestic market was stable. But this was well within our expectations as the (Fed) had already been priced in," said a trader at a foreign in


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 also refrained from raising on Thursday because it did not want to establish a pattern of following the Fed.

Deng Haiqing, chief economist at JZ Securities, said it was "debatable" that the PBOC decided not to raise the

"It was a good chance to fix the gap between the interest on the OMO and market rates," Deng said.

Still, the PBOC is keeping a wary eye on seasonal liquidity tightness, and has moved to inject large amounts of funds to ease worries of another cash crunch like that in June 2013, which sent money market skyrocketing.

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

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

Some traders said earlier in the week that a short-term rate rise was still possible in July if liquidity tightness eased.

($1 = 6.7933 Chinese yuan)

(Editing by Kim Coghill)

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)