Speculation is growing that China’s central bank will wield a liquidity management tool twice this month for the first time since March, and that has some traders feeling Beijing might tighten policy soon after this week’s Federal Reserve meeting.
The tool is the medium-term lending facility (MLF). Ten months ago, when the People’s Bank of China (PBOC) last made two such injections, it followed the Fed’s March lead and hiked its short- and medium-term target rates.
The Financial News, a newspaper under the PBOC, said last week a second MLF injection in December was probable.
A Shanghai money-market trader said this “could potentially mean the PBOC would raise rates during the next round of MLF rollovers”.
A batch of MLFs worth 187 billion yuan ($28.3 billion) matures on Dec. 16 – two days after the Fed decision is known in Asia.
Fanning speculation that tightening might be ahead, central bank researcher Sun Guofang told a conference last week that emerging market economies should start “monetary policy normalization” as soon as possible.
But it is not clear the PBOC will follow any Fed hike this time; it held steady in June, when U.S. rates last rose.
“There is no room for policy loosening, given that the Fed’s rate rises, balance sheet cuts and Trump’s tax cuts will lead to money flows to the United States,” said Tang Jianwei, an economist at Bank of Communications in Shanghai.
“We should not rush to tighten… If we tighten monetary policy, there will be big impact on the real economy.”
Chinese interest rates have risen this year, and prudential policies aimed at reducing debt and leverage have also effectively tightened market conditions.
The volume-weighted average rate of the benchmark seven-day repo closed at 2.8264 percent on Friday. The official published rate is 2.45 percent, and the spread has been widening, but the PBOC’s Q3 monetary policy report said it was “reasonable” for this rate to hover between 2.75-3 percent.
The benchmark secondary market yield on 10-year Chinese treasuries was 3.9102 percent, up around 80 basis points since the start of 2017.
One-year Shibor has also soared. On Friday, it was at 4.6562 percent, up from 3.3833 at the start of the year.
And the weighted average lending rate for non-financial firms, a key indicator of corporate funding costs, rose by 49 basis points in the first nine months to 5.76 percent.
“If market rates in China were hovering at low levels, then a rate hike in the United States could guide us; but our rates are already at high levels,” said Nie Wen, an economist at Hwabao Trust in Shanghai.
LESS YUAN CONCERN
Another factor, the yuan, is also less of a concern for policymakers. After falling 6.5 percent last year, the yuan has risen more than 5 percent in 2017 and worries of destabilising capital outflows have receded.
“The necessity for the PBOC to defend the yuan through a rise in money market rates has reduced markedly,” Gao Qi, currency strategist at Scotiabank in Singapore, wrote in a report on Wednesday.
Still, he expected the PBOC to raise its reverse repo and MLF rates in December “in step with an expected rate hike by the Fed” this week.
David Qu, markets economist at ANZ in Shanghai, says regardless of what happens with the Fed, the PBOC needed to raise its key market rates to catch up with reality of already-rising market rates.
The PBOC has raised rates on its liquidity tools this year, but at a combined 20 basis points (with the exception of one overnight rate), the increases to MLF, reverse repo and standard lending facility (SLF) interest rates have been much smaller than the rise in market rates on the back of the deleveraging push.
“Markets have already priced in a December Fed rate hike, and domestic market rates, i.e. Shibor, have climbed up fast to relatively high levels recently, it is necessary for the PBOC to make upward adjustment,” Qu said.
He expects a China rate rise before the end of March, and four increases next year.
Source: Reuters (Writing by John Ruwitch; Editing by Richard Borsuk)