China’s central bank raised interest rates on a key funding tool, the medium-term lending facility (MLF), on Tuesday in its latest bid to cut debt levels and bolster financial stability.
Policymakers are trying to keep the world’s second-largest economy sufficiently greased to counter an economic slowdown while also managing risks created by an explosive growth in debt that has fueled a housing boom.
China’s benchmark bond futures prices fell at the end of the trading day on the higher rates, as the People’s Bank of China (PBOC) also rolled over maturing MLF loans.
The central bank raised the interest rate for one-year and six-month MLFs by 10 basis points each to 3.1 percent and 2.95 percent, respectively.
The move was designed “to maintain basic stability in the banking system,” the PBOC said in a statement.
Analysts suspected this increase in the cost of one of the main money market funding avenues for banks was in line with the central bank’s broader objective of reining in speculative investment in the economy.
The MLF is a supplementary policy tool the central bank uses to manage liquidity conditions and medium-term interest rates in the banking system and money markets.
Tuesday’s move was the first rate rise in years, catching many market participants off guard.
Xia Haojie, a bond futures analyst at Guosen Futures, said higher MLF rates were intended to encourage deleveraging.
“Low interbank yields don’t reflect real borrowing costs in the real economy and have to trend higher, otherwise easy funding would only be used by financial institutions to make speculative arbitrage,” Xia said.
“Meanwhile, yuan depreciation pressure also puts upward pressure on Chinese yields.”
A source at a Chinese bank in Shanghai was surprised about the timing, given the generally tight liquidity conditions ahead of the week-long holiday.
“I have no idea why the bank released such bad news ahead of the holiday. The purpose of raising the interest rates on MLFs is still to cut leverage at financial institutions,” said the source.
The authorities have been tweaking policy settings to discourage excessive borrowing and deter capital outflows, including last year’s introduction of longer tenor open market funding operations and increased reporting requirements for overseas cash transfers.
The last time the PBOC adjusted interest rates on MLF loans was February 2016, when it lowered offered rates for six-month and one-year tenors. And the last explicit policy tightening was in 2011, when the central bank raised benchmark lending rates.
But Tommy Xie, a Singapore-based economist at OCBC Bank, said it might be too early to conclude that China had embarked upon a fresh tightening cycle.
“The next important thing to monitor is the interest rate for open market operations. Our forecast for 2017 benchmark lending and deposit rates remains unchanged for now,” he wrote in a report.
On Tuesday, the PBOC said it lent 245.5 billion yuan ($35.8 billion) to 22 financial institutions via MLFs.

Source: Arab News