Why Has China’s Central Bank Maintained Muted Response to Fed Rate Hike?

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The People’s Bank of China has opted to keep its repo rates steady in the immediate wake of the US Federal Reserve’s second rate hike since the start of 2017.

On Wednesday the Federal Reserve raised the fed funds rate 25 basis points to between 1% and 1.25%, for its second hike this year and the fourth since the end of 2015.

The Chinese central bank has responded to the Fed’s rate hike by maintaining repo rates unchanged. On 15 June PBOC engaged in 50 billion yuan of 7 day repo operations at 2.45%, 40 billion yuan in 14 day repo operation at 2.6%, and 60 billion yuan of 28 day repo operations at 2.75%.

Leading analysts such as former PBOC advisor Yu Yongding had previously opined that China should keep rates stable, and that any Fed rate hikes would be unlikely to have much impact on the market.

The imposition of strong capital controls will curb the potential for outflows triggered by interest rate differentials, while in Yu’s opinion policymakers are far more concerned by the potential economic impact of a slump in corporate bond issuance.

According to Liu Jianbiao, senior researcher with the Bank of Communications Financial Research Centre, there is now little likelihood of China raising its benchmark rates in response to the Fed’s latest hike, and rates for open market instruments can be expected to hold steady.

Speaking to Caixin Liu said that while open economies generally deal with US rate hikes by either raising their own heights in tandem or depreciating their currencies, China retains a closed capital account, and the impact of the Fed’s latest decision should be limited.

Rate hikes have also been factored into expectations, and the RMB exchange rate can be expected to remain stable.

China’s market rates have also risen considerably since the start of 2017 on the back of the country’s ongoing deleveraging drive, triggering a strong response from the market.

Writing for China Securities Journal, columnist Yan Yue said that PBOC can refrain from further rates adjustments at present because it has already acted in advance, as it has been wont to do in the past.

He notes that prior to the Fed’s March rate hike, PBOC had raised rates for 7 day, 14 day and 28 day repos by 10 basis points on 3 February and 16 March.

Yan notes that another key reason that PBOC has refrained from corresponding rate hikes is that the effects of deleveraging of the financial system are becoming apparent, with growth in the M2 money supply falling to a historic low of 9.6% in May.

Deng Haiqing, global chief economist of Jiuzhou Securities, said that PBOC may have refrain from domestic rate adjustments in order to avoid giving the impression that it’s simply tracking Fed rate hikes.

 

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