Beijing - China's central bank raised short-term interest rates on Thursday in what economists said was a bid to stave off capital outflows and keep the yuan stable after the Federal Reserve raised US rates overnight.
The rise in short-term rates was China’s third in as many months and came a day after the annual session of parliament where leaders warned that tackling risks from a rapid build-up in debt would be a top policy priority this year.
Hours earlier, the Fed raised its benchmark policy rate and signalled more hikes were on the way as the US economy picked up steam.
“The timing says it all. China is no longer insulated from the Fed and, more generally, from international financial conditions,” said Alicia Garcia Herrero, chief Asia Pacific economist at Natixis.
The People’s Bank of China (PBOC) also strengthened the yuan’s daily mid-point reference rate by the most in about two months.
The yuan fell 6.5 percent to the dollar last year in the face of dollar strength and uncertainty over China’s economy.
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The yuan has been largely stable this year as the dollar has paused, but China’s government has remained alert as market watchers expect the dollar to resume its climb.
Corporate debt
PBOC governor Zhou Xiaochuan said corporate debt levels were too high, but stressed it would take time to bring them down to manageable levels.
In keeping with that cautious tone, most increases yesterday were a modest 10 basis points, the same as moves in various short- and mid-term policy instruments in January and last month.
The rate on open market operation reverse repos for seven-day, 14-day and 28-day tenors was bumped up for the second time in six weeks, to 2.45 percent, 2.6 percent and 2.75 percent, respectively.
The PBOC insisted the moves did not indicate a change in its monetary policy or constitute a hike in its benchmark policy rate, although some economists say the seven-day reverse repurchase rate has become an actual policy rate.
The PBOC also raised the borrowing rate on its medium-term lending facility (MLF) loans to 3.05 percent and 3.2 percent, respectively, after a similar move in late January. The MLF is a supplementary policy tool it uses to manage liquidity conditions in the banking system and money markets.
The PBOC injected fresh funds into the financial system to maintain liquidity. It lent 113.5 billion yuan (R210 billion) of six-month MLF loans and 189.5 billion yuan of one-year MLF loans to 17 financial institutions yesterday.
China cut its economic growth target to about 6.5 percent this year as leaders pledged to push through painful reforms to address high debt levels.