Broker's View

Is China heading for a benchmark rate rise?

New bank loan growth in December 2016 jumps to 400 billion yuan more than expected and home sales continue to boost mortgage loan growth

PUBLISHED : Wednesday, 01 February, 2017, 4:10pm
UPDATED : Wednesday, 01 February, 2017, 10:44pm

The Chinese central bank has raised one of its policy rates – on medium-term lending facility (MLF) loans – for the first time in six years, but analysts have shrugged off the possibility of a “real” rise in the lending and borrowing interest rates in the near term.

“The MLF rate rise is targeted on deleveraging the financial market. It’s more like sending a signal [to control the financial risks] rather than a substantial move [for monetary tightening],” Jiang Chao, an analyst at Haitong Securities wrote in a research report.

The real interest rate, namely the borrowing and lending rate for banks, is unlikely to be raised for the time being as downside risks in domestic economic growth still exist, analysts at Guotai Junan Securities wrote in a note.

The People’s Bank of China (PBOC) raised both the six-month and one-year rates for MLF loans 10 basis points on January 24, to 2.95 per cent and 3.1 per cent respectively, their first rise since the tool started being used in 2014.

It is also the first time in six years the Chinese central bank has raised one of its policy rates, leading to a drop in the bond market last week amid speculation that the country had ended monetary easing and is on track to start raising borrowing and lending rates.

The MLF rate rise also perplexed the market, as the PBOC had launched a Temporary Liquidity Facility (TLF) the week earlier to inject short-term liquidity into the banking system, which was interpreted as an easing signal.

Analysts say that although monetary easing has ended, the PBOC does not seem to be in any rush to raise real interest rates.

MLF loan operations mainly affect financial markets, while an adjustment in lending and borrowing rates not only affect financial markets but more importantly, affect the financing costs for the real economy
Zhao Wei, Changjiang Securities

“MLF loan operations mainly affect financial markets, while an adjustment in lending and borrowing rates not only affect financial markets but more importantly, affect the financing costs for the real economy,” Zhao Wei, Changjiang Securities wrote in a research note.

“We don’t think the MLF rate rise was a reaction to the US rate rise or the depreciation of the yuan...The government wanted to send a signal to tighten loan growth and financial leverage,” CICC analysts said.

Many now think a bubble in the financial market is brewing. New bank loan growth in December 2016 jumped 1.04 trillion yuan month on month, much more than market expectations of 700 billion yuan, pushing the full-year lending growth to a record high of 12.65 trillion yuan.

The home sales rebound in the third- and fourth-tier cities didn’t help to restrain mortgage loan growth either, giving policymakers a stronger incentive to control loan growth, CICC analysts wrote in a note.

But the change in borrowing and lending interest rates depends more on the real economy than the financial market. In the past, a benchmark rate change would not come until the rates in the open market had been adjusted several times.

Additionally, Chinese economic risks still exist and there’s downside pressure in the mid-term, and too much tightening will have more of a negative effect than a positive one, Guotai Junan analysts said.

The demand for cars and property is decreasing, while food prices – a key factor for inflation rate growth – is likely to have stood still at 2016’s high level, leading to a fall in the Consumer Price Index growth after February, Jiang said.

The central bank is now likely to make frequent open market operations, CITIC Securities analyst said.

The MLF rate hike will mainly have a negative effect on the onshore bond market, which is entering a technical bear market, CITIC Securities analysts added, expecting the benchmark yield for 10-year treasury notes to hover at around 3.3 to 3.4 per cent, with higher volatility.

However, its impact on stocks, commodities and the macro economy has been limited so far, according to Guotai Junan Securities.

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