China Unexpectedly Hikes Rates Despite Disappointing Retail Sales Growth

China, somewhat unexpectedly, hikes rates this evening, minutes before dumping economic data that showed no major surprises other than a modest disappointment in retail sales growth.

Of course, we had a suspicion that China might hike rates, as it has done in response to previous rates hikes by the Fed in 2017.

PMIs and other early indicators have pointed to continued robust growth in China’s economy, writes Bloomberg Economics economist Qian Wan. On November’s industrial production, she says:

“Government curbs on air-polluting industries are a downside risk. Surprisingly strong November exports though, point up.”

And tonight's data shows no major surprises:

  • China Retail Sales (Nov.) MISS +10.2% YoY vs +10.3% exp; prior 10%
  • China Industrial Production (Nov.) MEET +6.1% YoY vs +6.1% exp; prior 6.2%
  • China Fixed Asset Investment (Year-to-Date) MEET +7.2% vs +7.2% exp; prior 7.3%


However, as Bloomberg notes, minutes before the data, a surprise move by the PBOC to boost interest rates in open-market operations, acting after the Fed increased its benchmark rate overnight. A suggestion that policy makers are confident the economy is strong enough to withstand further deleveraging.

This is the 3rd rate hike of the year for China.

The current money-market rates are significantly higher than the open market operation rates and the small increase in OMO rates could narrow the gap appropriately and help ease market distortion, PBOC says in statement on website.

The move reflects supply and demand in the market and is the market’s normal reaction to the U.S. rate hike.

The move was modest, and they haven't touched their main rate, but, as Bloomberg's Enda Curran notes, nonetheless it's a tweak that hadn't been expected and hints that there's more to come.

As a reminder, the Chinese yield curve had been inverted for weeks before the latest shift and as the MLF rate rises, it gets ever closer to the 4% trigger rate on the long-bond that appears to be the line in the sand for China right now...

Here's what Qin Han, chief bond analyst at Guotai Junan Securities, said about the PBOC's move today:

"This is good news for bonds, as the PBOC only raised the rates by 5 basis points. This could be interpreted by the investors as a signal that the policy makers do not want to worsen the recent selloff in bonds and stocks."


"Bond yields will drop in the coming few months, as the authorities may refrain from tightening monetary policy and toughen financial regulations too quickly."

So at the end of the day, all the data was pretty much as expected, with no signs of a steep down turn which is maybe what gave the PBOC confidence to move.