Central bank move signals neutral monetary policy

Higher rates show China's resolve to prevent financial risks: experts

The People's Bank of China's (PBC) measure to raise reverse repurchase agreements (reverse repos) and standing lending facility (SLF) short-term loan rates signals that the country's monetary policy is shifting from a "loosening bias" to a neutral one.

Experts said the move shows the country's resolve to control market liquidity and prevent financial risks, which has limited impact on the interest rates of depository and loans.

China's central bank on Friday announced it would raise the seven-day reverse repo rate by 10 basis points to 2.35 percent. It also increased the rate for 14-day reverse repos to 2.5 percent from 2.4 percent, and the 28-day open market operations rate to 2.65 percent from 2.55 percent, according to the official website of the central bank.

Reverse repo is a process in which a central bank purchases securities from banks with an agreement to sell them back in the future, a means of pumping money into the market to preserve liquidity.

The PBC also increased the lending rates on its SLF short-term loans by up to 35 basis points.

SLF is a tool used by the PBC to give short-term liquidity support to policy banks and commercial lenders.

Experts believe the central bank has raised interest rates for short-tem loans in order to tighten market liquidity and to control financial risks.

"In the past two years, economic policies tended to be loose in the first half of the year while tightened in the second half. For example, the central bank twice lowered required reserve ratio and interest rates from February to May 2015… the 'loosening bias' policy led to bubbles in the stock and property markets," said Li Xunlei, chief economist at Zhongtai Securities.

With an increased emphasis on preventing financial risks and strengthening financial supervision in 2017, the central bank's move sent a signal to the market that China's monetary policy is shifting from a "loosening bias" to a more neutral one, Li told the Global Times Sunday.

Chief economist with China CITIC Bank in Hong Kong Liao Qun noted that the move is only a slight adjustment in market liquidity. "The central bank raised the rate to tighten liquidity as the fund need is declining after the Spring Festival. It is a short-term liquidity-oriented micro-adjustment move and should not be taken as a tightening of PBC's monetary policy," he told the Global Times Sunday.

To support the temporary needs of financial institutions, the PBC carried out SLF operations worth 87.68 billion yuan ($12.77 billion) in January, according to a statement on the bank's website on Friday.

Liu Dongliang, a senior analyst at China Merchants Bank, argued that the interest rate increases on Friday were not "typical" because the government has not yet changed the benchmark one-year deposit and loan interest rates.

But he said in a note sent to the Global Times that the move is helpful in curbing financial institutions' lending motivation, as it has been rumored since the beginning of 2017 that domestic banks will provide a large amount of loans to the market.

In recent years, loans have skyrocketed in the first month of each year, domestic news portal caixin.com reported in January.

Newly-added loans in January 2016 reached 2.51 trillion yuan, soaring about 70 percent year-on-year, according to the report, noting that the loan scale in January 2017 may surpass that of last year.

No rate-hike cycle

However, experts noted the nation won't embark on an interest rate hike cycle as the country's economy still faces downward pressure and exports, private investment and the property sector face challenges.

The operations rate will not continue to rise mainly because China's economic downward pressure still exists, and U.S. President Donald Trump's potential stimulating policies may bring external shocks beyond expectation and domestic inflation pressure is not heavy, according to Liu.

Liao noted that "the opportunity for the central bank to tighten monetary policy has not come because of uncertainties in exports, private investment and a cooling property market… We can't take it for granted that the domestic economy will remain stable as it was last year."

A blue book on China's economic development released by the Chinese Academy of Social Sciences, a government think tank, in December predicted that GDP will rise around 6.5 percent this year, slower than the 6.7 percent in 2016.

Two main tasks for China's economy in 2017 are stabilizing growth and preventing risks, Li said, noting that continuously raising interest rates will break asset bubbles, triggering systematic risks.

He forecast that the country's monetary policy will be a little tight in the first half of the year and a little loose in the latter half, compared with the policies of the past two years.