When the Fed last hiked rates by 25bps in March, China's central bank followed suit almost immediately by engaging in a "soft" hike, raising the rate on its various reverse repo operations by 10bps.
But not this time: when the PBOC announced its daily reverse repo operation last night, which saw a net injection of CNY 90 billion in the market, traders were only looking at one thing: whether the PBOC would again raise rates on its various reverse repos. It did not, and as we remarked last night, the PBOC instead kept all open market operation rates unchanged at 2.45%; 2.6%; 2.75% for 7/14/28 day repo.
China does not "hike": keeps reverse repo rates unchanged at 2.45%; 2.6%; 2.75% for 7/14/28 day repo— zerohedge (@zerohedge) June 15, 2017
As JZ Securities' chief economist Deng Haiqing summarized, the PBOC’s decision not to follow Fed is "significantly great news" for bonds.
Why did PBOC chair Zhou Xiaochuan "break stride" with Yellen? For one, it is possible he is simply late - after the Fed raised rates in December, the PBOC didn’t follow suit until February.
However, this time, Bloomberg thinks the split may be for real: it suggests "Zhou sees more autonomy to address domestic challenges, with the yuan holding stable and tighter capital controls keeping outflows at bay. More independence allows China’s policy makers to shrug off Fed tightening for now, as there are already signs growth will slow in coming quarters amid curbs aimed at cooling the property market."
Helping the PBOC's "independence" is the recent blow out in spreads between China and the US. The yield gap between U.S. and Chinese 10-year sovereign bonds widened to a two-year high of 150 basis points on June 6, compared with less than 90 on March 15. That means there’s less appeal for moving money to the U.S., easing the pressure on outflows.
Of course, that in itself is hardly a glowing sign of Chinese stability: as explained last night, surging rates mean that Chinese corporations face their own day of default reckoning as they seek to rollover billions in short-term debt among Beijing's ongoing effort to deleverage the economy. However, for the PBOC that bridge will be crossed when the time comes.
Another potential reason for the PBOC's decision is that it believes its capital controls are sufficiently sturdy to prevent further capital flight. The PBOC charting its own course "protects China from being exposed to uncontrollable risks" said Lu Zhengwei, chief economist at Industrial Bank Co. in Shanghai. "The central government would like to press ahead with deleveraging, and it wants to ensure the process is smooth and stable. Capital control measures have allowed them to do so."
Also opining on the decision, Ming Ming, a former central bank monetary policy official told Bloomberg tgat "the PBOC raised rates in March because it wanted to curb financial leverage, and now it doesn’t have that intention as previous measures have already proven quite effective."
The good news, if only for now, is that the Fed's policy does not have instantaneous global implications. "Fed decisions are becoming less influential to China’s monetary policy now than at the beginning of the year," said David Qu, an economist at Australia & New Zealand Banking Group Ltd. in Shanghai. "That allows policy makers to focus more on challenges at home."
Then again, looking at the red among equities morning, including the drop in Chinese markets and commodities, the PBOC may be dragged right back into the hiking fray as it finds that being pegged to the dollar means just that.
Not convinced? Here are a handful of other opinions from analysts this morning, courtesy of Bloomberg:
First Capital Securities (Shen Bifan, fixed-income analyst)
- Considering that the interest-rate gap is already quite large, keeping costs steady shouldn’t lead to capital outflows
- There’s less pressure on the PBOC to use rates to lend support to the currency because the introduction of a counter- cyclical factor to the yuan’s fixing has led to a strengthening exchange rate
Also, as the economy is flashing signs of cooling and June is a month which usually faces liquidity stress, the PBOC may not want to bring additional pressure to the market
- Even if the PBOC tightens, it probably won’t have any material impact on markets as expectations of credit and supervisory tightening are already priced in
Citic Securities (Ming Ming, head of fixed-income research)
- The PBOC raised rates in March because it wanted to curb financial leverage, and now it doesn’t have that intention as previous measures have already been quite effective
- Optimistic about bonds as market conditions will improve in June and in the third quarter
ABCI Securities (Yao Shaohua, economist in Hong Kong)
- The PBOC remains on hold so far as the yuan stays relatively strong against the dollar and outflows ease
- Capital control measures also help put an extra buffer; as long as the economy and the currency keep stable, the Fed is unlikely to cast a big influence over the PBOC
AXA Investment Managers Asia (Aidan Yao, senior economist)
- Don’t have a very strong internal or external justification for the PBOC to follow the Fed now
- The yuan depreciation pressure is no longer as intense as in the past and, if anything, the currency has been appreciating in the past two weeks
JZ Securities (Deng Haiqing, chief economist)
- PBOC’s decision not to follow Fed is "significantly great news" for bonds
- Chance that bonds may enter a "slow bull" market, as some investors are pessimistic about the economy