Why China Unexpectedly Hiked Rates 10 Hours After The Fed

Tyler Durden's picture

As we reported on Wednesday evening, something interesting took place on Thursday morning in Beijing: in a case of eerie coordination, China tightened monetary conditions across many of the PBOC's liquidity-providing conduits just 10 hours after the Fed raised its own interest rate by 0.25% for only the third time in a decade.

The oddly matched rate hikes, prompted Bloomberg to think back to the mysterious "Shanghai Accord" of February 2016, which took place during the peak days of last year's global capital markets crisis, and whose closed-door decisions - to this day kept away from the public - prompted the market rally that continues to this day. As Bloomberg wrote, the coordinated "response suggests that pledges by the Group of 20 economies a little over a year ago in Shanghai to "carefully calibrate and clearly communicate" policies may not have been hollow after all."

That said, it was not the first time the People’s Bank of China has acted on the heels of a Fed move. At the peak of the financial crisis, the PBOC cut lending rates after six of its counterparts, including the Fed, had announced a simultaneous rate cut. That October 2008 move enhanced China’s emerging reputation as a global player on the international economic-policy circuit. “Growth divergence is morphing into growth synchronization," said Chua Hak Bin, a Singapore-based senior economist with Maybank. "Policy divergence was also a narrative for those expecting a strong dollar, but that is moving now to policy synchronization.”

Coordinated or not, as of last night financial conditions in China, like in the US, have become incrementally tighter even if both the Chinese and US stock markets failed to respond accordingly.

So, for those curious what China did - after all the days of shotgun Interest rate or RRR moves appear to be on hibernation for the time being - here is a convenient primer from SocGen's Wei Yao explaining not only the mechanics, but the reason why.

As Yao notes, the PBoC followed the Fed closely, at least timing-wise, and raised the rates on its major liquidity management tools by 10bp across the curve today, earlier than many had expected. After the hikes, the rate on the 7D reverse repo operations - the most critical of all - is now at 2.45%.


The central bank, in its press release, stressed that these interbank rate hikes simply follow the market's development, thus not true policy rate hikes, and only hikes of benchmark lending and deposit rates count. Nevertheless, it also listed four classical rate-hike reasons for the interbank rate changes: the economic recovery, rising inflation (particularly that of housing), strong credit growth and Fed's rate hikes.

SocGen's interpretation of this statement is:

  1. The PBoC is responding to the fundamentals of growth, inflation and financial stability. And it is looking through the low food prices, which have suppressed CPI, and paying due attention to domestic asset bubbles and credit growth.
  2. But it still prefers a tightening approach so as to match its neutral stance, which means that adjusting interbank liquidity and interbank rates will likely remain the main actions. This may be because the headline CPI is muted after all, or because it has to change its policy rates from benchmark deposit/lending rates to interbank-linked rates sooner or later and so better start practicing now. In any case, it does not want the market to get ahead itself and price in too much tightening, just like the Fed.
  3. Fed's policy and US-China interest rate differentials do play a role in PBoC's consideration. It may not be a very big role, as offering 10bp for every 25bp from the Fed is at best half-hearted help to the RMB. However, the Fed's action offered the PBoC a timing to make the move, appearing to support the argument that the interbank rate hikes are “following the market”.

Given PBoC's latest move and our view that growth stability will stay until the end of 2017, SocGen now expects further interbank rate hikes: 20bp in 2Q, 10bp in 3Q and no change in 4Q.

The equally critical development to watch is the evolution of interbank market rates as resulted from PBoC's daily liquidity management. The trend of these market rates leads the changes of rates on PBoC's instruments, thus a more timely indication of PBoC's intention. Before today's moves, the 28-day moving average of the 7d repo was already 50bp above the low back in August 2016.

Finally, while China has traditionally shied away from criticizing the Fed using conventional channels, in a surprising editorial in the Economic Information Daily, the authors said that China should be wary of a "spillover effect" from the Fed rate hikes, warning that “selfish” US interest rate policies have historically triggered crises in many other nations, the newspaper says in its front-page commentary. Finally, it warned that frequent Fed rate hikes may have “serious impact” on global economy.

Keep a close eye on tonight's reverse repo facility: if China is really concerned, it very well may "hike" again.

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Arnold's picture

O_Ops I spoke too soon.
Granma got knifed.

GUS100CORRINA's picture

CB Panic??


The CBs have no choice. 

SLOW or NO growth accompanied by rising prices. DEBT and EASY MONEY unintended consequences has arrived.

THEORIES are now becoming REALITY.

=== Quotes from Ludwig von Mises ===

The gold standard did not collapse. Governments abolished it in order to pave the way for inflation. The whole grim apparatus of oppression and coercion, policemen, customs guards, penal courts, prisons, in some countries even executioners, had to be put into action in order to destroy the gold standard.

Continued inflation inevitably leads to catastrophe. 

What people today call inflation is not inflation, i.e., the increase in the quantity of money and money substitutes, but the general rise in commodity prices and wage rates which is the inevitable consequence of inflation.

The illusiveness of this concept of national income is to be seen in its dependence on changes in the purchasing power of the monetary unit. The more inflation progresses, the higher rises the national income.

If one regards inflation as an evil, then one has to stop inflating. One has to balance the budget of the government.

The most important thing to remember is that inflation is not an act of God, that inflation is not a catastrophe of the elements or a disease that comes like the plague. Inflation is a policy.

Government policies try to prevent the emergence of serious unemployment by credit expansion, i.e., inflation. The outcome was rising prices, renewed demands for higher wages and reiterated credit expansion; in short, protracted inflation.

... Ludwig von Mises

MrNoItAll's picture

Of course the major global powers and their central banks are coordinating financial and economic strategy.  A band of thieves they are and the pickens are good these days.

buzzsaw99's picture

in china they "show" gifts. that is to say they show you something nice for your birthday but you don't get to keep it as the giver takes it home with them when the party is over. likewise these are "show" hikes. if china wanted to tighten conditions they could do it with one whispered word. the truth is they are propping up bazillions of insolvent companies as we speak. they roll over notes or forego, ah fuck it, you people read zh. enough said.

francis scott falseflag's picture


Ol' Man China, Dat Ol' Man China


I gets weary, and sick of trying

I'm tired of livin' but scared of dyin'