People’s Bank of China raises money rates twice this year

Shanghai/Beijing: China’s central bank will keep a tight rein on money-market rates this year, raising the cost of short-term funds at least twice in moves that will pressure bonds.

That’s the consensus view in a survey of 29 fixed-income traders and analysts, with 20 saying that the People’s Bank of China will increase open-market operation rates by 10 basis points in the second quarter itself. Government bonds will decline for the third quarter in a row in the April-June period, according to the March 24-27 poll. That would be the longest run of losses in six years.

China’s policy makers are walking a fine line between driving money rates higher to reduce leverage in the financial system and preventing a cash crunch. They have already raised the cost of reverse-repurchase agreements twice this year, while benchmark interest rates have been on hold since 2015. A separate survey predicted that the PBOC will keep both benchmark borrowing costs and bank reserve-requirement ratios unchanged throughout the year.

“China is far from the end of efforts to squeeze out bubbles in the financial system,” said David Qu, a Shanghai-based markets economist at Australia & New Zealand Banking Group Ltd. “The PBOC will to some extent follow the Federal Reserve in tightening to keep the rate gap largely steady.”

The PBOC kicked off its latest tightening cycle in August after broad monetary loosening helped fuel an unprecedented, 11-quarter bond rally. The central bank resorted to injecting longer-term funds in open-market operations, and raising the cost of loans to commercial lenders. On 16 March, while explaining the rationale for its latest open-market borrowing cost increase after a Fed hike, the PBOC said higher rates would help offset a drop in real interest rates and maintain a yield advantage over the US.

PBOC governor Zhou Xiaochuan told reporters during the National People’s Congress earlier this month that taming the credit binge will be a “medium-term process.” At the Boao forum held over the weekend, he said one of the priorities in China’s structural reforms in the short- and medium-term is lowering leverage.

“The funding market will become more volatile in the second quarter and there will be more frequent hiccups,” said Yan Yan, the Shanghai-based head of fixed income trading at China Guangfa Bank Co. “The pivotal level of funding costs will rise further.” Bloomberg