China Raises Medium-Term Lending Rates in Tightening Signal

Updated on
  • PBOC says MLF operations added 245.5 billion yuan to system
  • Central bank boosted rates on 1-year, 6-month loan facilities

Why Money Keeps Flowing Out of China

China’s central bank increased the interest rates on medium-term loans that it uses to manage liquidity, a move analysts say signals its intent to keep a tight rein on leverage in the financial system.

The one year Medium-term Lending Facility rate was raised to 3.1 percent from 3 percent and the six-month rate to 2.95 percent from 2.85 percent, the People’s Bank of China said in a statement Tuesday. The monetary authority said the operations injected 245.5 billion yuan ($36 billion) into the financial system.

Policy makers are trying to strike a balance between avoiding excess credit that fuels asset bubbles and keeping enough funding in the financial system amid surging seasonal demand before the start of the Lunar New Year holiday this week. They’re also using new tools as they turn away from old ones like the benchmark interest rate and required reserve ratio.

The PBOC is raising rates while injecting a record amount of liquidity to avoid sending an easing signal, said Qin Han, a bond analyst at Guotai Junan Securities Co. in Shanghai. Raising mid-term rates won’t directly impact short-term funding supplies, he said in a note.

China’s one-year interest-rate swaps, which reflect market expectations for seven-day repurchase rates over a year, jumped 15.5 basis points, most since March 2015, to 3.28 percent as of 5:40 p.m. in Shanghai. The yield on 10-year government bonds due in November 2026 climbed 7.5 basis points to 3.305 percent, data compiled by Bloomberg show.

The central bank has increasingly managed the flow of credit with the MLF rate, a more finely-tuned instrument than changing how much of their deposits lenders must keep locked away. The PBOC’s official newspaper recently said new funding tools used to adjust the flow of credit in and out of the financial system are playing a major role in monetary policy.

Reining in risk has become the main theme in recent months. President Xi Jinping and his top economic deputies said last month in an annual statement that they plan prudent and neutral monetary policy and will prioritize controlling financial risk to avoid asset bubbles.

"We believe the reason for the PBOC to raise the MLF is aiming to mop excessive liquidity and prevent potential financial risk in the system, particularly the shadow banking sector," Raymond Yeung, chief greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong, wrote in a note.

— With assistance by Yinan Zhao, Tian Chen, Xize Kang, and Helen Sun

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