China Unexpectedly Tightens Monetary Policy

Tyler Durden's picture

Following The Fed's 3rd rate hike in 11 years, the PBOC decided, unexpectedly, to follow in the Fed's footsteps, and tighten conditions by raising the interest rates on its open-market operations, the 7-, 14-, and 28-day reverse-repos, by 10bps each, to 2.45%, 2.6% and 2.75% respectively.

That followed an increase of 10 basis points at the beginning of February, which in turn was the first increase in the 28-day contracts since 2015 and since 2013 for the other two tenors.

One month ago, the PBOC also - for the first time ever - increased the rate on the PBOC's Medium-Term Lending Facility, or MLF. It did it again on Thursday, when the PBOC conducted CNY303 billion in 6-month and 1-year MLF, where the interest rose by 10bps, from 2.95% to 3.05%, and from 3.1% to 3.2%, respectively.

What to make of this tightening? According to the PBOC nothing: the Central bank said there was "no need to over-interpret monetary tools action" and added that higher open market operation interest rates don’t mean benchmark interest rates are increasing.

Except they are, of course, especially since like in western nations, increasingly it is narrowly confined liquidity conduits that matter instead of broad, shotgun market rates.

Naturally, this was not exactly great news for those hoping for a renewed credit impulse to lift the tumbling GDP expectations of the world in Q2. For now the reaction is minimal with Yuan leaking lower, erasing the gains against a weaker post-Fed dollar.

China bond futures took a hit.

As Bloomberg's Kyoungwha Kim reports, the PBOC is swift enough to raise the repo rates but will stop short of raising the key interest rate, following the Fed. The huge wall of debt set to mature over the next two years will likely keep the PBOC from raising the key rate even as the Fed hikes away. It will probably continue to use higher money-market rates to discourage leverage. While Chinese money market rates and sovereign yields are still showing declines due to delayed prices, traders say they are seeing reaction in the interbank market already.

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BandGap's picture

PMs moving up after hour, too.

No talk of debt ceiling, China selling T-bills and raising rates. Something is brewing.

youarelost's picture

Not brewing. This is all centrally planned implosion to take full control

TheRideNeverEnds's picture

Nobody is talking of the debt """ceiling""" because it's bullshit. It has never been a ceiling, just a theoretical numerical pause (while actual debt keeps increasing) for elected officials to grandstand before increasing it.

There is literally zero chance they don't raise it and if volatility happens to increase around it you should sell the VIX with both fucking hands because it will implode after they resolve it and the market will continue higher into perpetuity.

The plan is not to crash the market but to buy it all. Buy it before the bankers do, in a few years when there are just a few shares which banks do not already own each share will be worth a fortune.

call a spade a spade's picture

Stack, stack, stack folks. 

Fundies's picture

I like a tightening world.

TheRideNeverEnds's picture

Bullish.

What do you think we will gap up on the open tomorrow, 10, 20, 50 points on the SPX?

buckstopshere's picture

Why not just 1 basis point?

0.01%

GoldHermit's picture

Are they out of their fucking minds?????

peterk's picture

world rates are moving up,  its been going  on for a year now and  everyone  THINKS its just

a small increase in this and that country with no  implications.

they dont get it that  the world bond bubble  rally is over after 35 years

The high  leveraged countries will feel the pain.. US China  Australia

 

US - can milk  its resrerve currency status to survive

Chine- it has actual production and a real economy.. it survives

Australia- it has nothing but a debt and housing bubble... it is a "leverage  SQUARED" economy.

Only outcome is a crashing $AUD

whatisthat's picture

I would observe world interest rates are heading north of 6%.

Last of the Middle Class's picture

Time to milk the cow. Good luck with that.

Let it Go's picture

For a long time, it has appeared the whole world is trapped in an easy money low-interest rate environment with no way out. This is a sign that in the future a massive problem is developing and it holds huge economic ramifications and a major risk.

Many of us have a problem lending hard earned money out for a long period of time and we should be wary. Rates are based on predictions of future government deficits and events around the world that may or may not unfold as expected.

 If the bond market is indeed a bubble the implications of its collapse will be massive and such an event will not only affect bondholders but will test the economic foundations of both the country and the world. Bond holders would be stripped of wealth and soaring interest rates will magnify the nations debt service and rapidly impact our deficit. More on this subject in the article below.

 http://brucewilds.blogspot.com/2015/12/bond-market-bubble-ending-has-massive.html