China's Central Bank Raises Interest Rates for Reverse Repos, Surprising Financial Markets
Yicai Global
/SOURCE : Yicai
China's Central Bank Raises Interest Rates for Reverse Repos, Surprising Financial Markets

(Yicai Global) Feb. 3 -- China's central bank has raised reverse repurchase agreements (repo) rates for the first time in over a year, which is likely to help rein in capital outflows.

The People's Bank of China conducted seven-day reverse repurchase agreements worth CNY20 billion (USD2.9 billion) today, at an interest rate of 2.35 percent, which was up 10 basis points from that of last operations and was the first rate increase since Oct. 27, 2015.

The central bank also sold CNY10 billion of 14-day reverse repurchase agreements, at an interest rate of 2.5 percent, which was up 10 basis points compared with that of last operations and was the first rate increase since Feb. 2, 2016. It also offered CNY20 billion in 28-day reverse repurchase agreements, at an interest rate of 2.65 percent, which was again up 10 basis points over the rate during the last operations, marking the first rate increase since Jan. 19, 2016.

The central bank raising reverse repo rates signals that regulators do not want businesses to excessively increase leverages, said Natixis, a French corporate and investment bank. Interest rates on other interbank policy tools are set to rise by 10 basis points following the reverse repo rate hikes. However, this does not mean the beginning of a monetary tightening cycle as liquidity remains ample despite rising fund costs. Higher domestic interest rates will make American investments less attractive amid a rising interest rate cycle and will help slow the pace of capital outflows.

Earlier, the central bank raised interest rates on medium-term lending facility (MLF) loans. Market participants say investors still need to keep an eye on policy orientation signals sent by MLF operations, adding that interest rates in the open market and even benchmark interest rates are likely to be raised, and their pace of increase will depend on changes in economic and financial factors both at home and abroad.

China is likely to tighten its monetary policy as the US Federal Reserve Bank has entered an interest rate hike cycle. The domestic economy has also stabilized and inflationary expectations have picked up, which makes the economy planners more determined to guard against risks. It is more likely that policy interest rates go up rather than go down. However, given that reverse repo rates have remained stable since Jan. 26, this process will be gradual and progressive, they predict.

On Jan. 24, the People's Bank of China lent a total of CNY245.5 billion to 22 financial institutions through its medium-term lending facility. CNY138.5 billion will mature in six months and CNY107 billion will mature in one year, with interest rates of 2.95 percent and 3.1 percent, respectively, up 10 basis points from those of the last MLF loans, taking the market by surprise. It was the first interest rate hike in the history of MLF since it was launched by the central bank in 2014.

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