Thursday, March 22, 2018

China raises 7-day repo rate 5 bps, HK raises base rate

      China raised its 7-day reverse repurchase rate, used for money market operations, by 5 basis points to 2.55 percent, saying this was in line with market expectations and "a normal reaction" to the U.S. Federal Reserve's increase of its key interest rate on March 21.
       But the People's Bank of China (PBOC) again left its benchmark one-year lending rate at 4.35 percent. This rate was last cut in October 2015.
       Hong Kong's central bank, the Hong Kong Monetary Authority (HKMA), also raised its base rate by 25 basis points to 2.0 percent in response to the Fed's 25 point increase in its fed funds rate to 1.50 - 1.75 percent.
        Hong Kong's monetary policy tracks that of the U.S., with the Hong Kong dollar trading in a band of 7.75 - 7.85 to the U.S. dollar. In recent months the Hong Kong dollar has come under pressure as the spread between Hibor, the local lending rate,  and Libor has widened due to an abundance of liquidity in the banking system.
       The PBOC's rate increase comes days after the National People's Congress (NPC) named Yi Gang as successor to Governor Zhou Xiaochuan, who has been at the helm of the PBOC since 2002. 
      Yi, deputy governor of PBOC, joined the PBOC in 1997 after first earning a business degree at Hamline University in Minnesota, then a Ph.D in economics at the University of Illinois before joining the University of Indianapolis as professor in 1986.
       In 2017 the PBOC raised various short- and medium-term rates four times, with two of the increases following Fed rate hikes in March and December. However, it did not change rates following the Fed's rate hike in June.
       The rate on the the PBOC's 7-day reverse repo rate was last raised on Dec. 14, 2017 -  in line with the Fed's rate hike on Dec. 13 - by 5 basis points to 2.50 percent. A few days later the 14-reverse repo rate was raised to 2.65 percent from 2.60 percent.
       In a statement on its website, PBOC said the interest spread between China and the U.S. will help guide the relationship of open market rates to currency rates, and help market players form interest rate expectations and "restrict irrational financial behavior," stabilizing leverage ratios.
       Since the beginning of this year, the PBOC said it had stepped up the fine-tuning and anticipatory open market operations to maintain stable, moderately flexible liquidity in the banking system, and to guide the rational growth of money and credit.
       The combination with a slight upward movement of open market interest rates is conducive to supply, the PBOC added.
       Analysts expect the PBOC to raise its reverse repurchase rates several times this year as it attempts to deleverage the economy but then also lower the reserve requirement rate from 17 percent to support smaller businesses.
       China has been tightening up its regulatory structure in recent years to better control shadow financing and reduce the risks in the financial system while still maintaining economic growth.
       The gradual increase in interest rates is also aimed at squeezing asset bubbles and curbing the growth of debt
       Last week the NPC changed some of China's financial regulatory structure, merging its banking and industry regulatory commissions into one group and giving the PBOC the power to draft key regulations and prudential oversight. 



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