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Federal Interest Rate

China’s interest rates poised for a quick rise, in response to US moves

Higher Chinese interest rates loom, as the one-year Shanghai Interbank Offered Rate hits a two-year high, perching above the one-year prime loan rate

PUBLISHED : Wednesday, 24 May, 2017, 9:00am
UPDATED : Wednesday, 24 May, 2017, 9:02am

The interbank funding cost of Chinese banks is quickly approaching, if not exceeding, the interest rate banks charge their clients, creating a distorted view of the financial landscape that could lead to some shrinkage in bank lending or a quick rise of interest rates in the world’s second-biggest economy.

The one-year Shanghai Interbank Offered Rate, based on the interest rates at which banks offer to lend unsecured funds to other banks in the Shanghai wholesale money market, rose above the one-year prime loan rate, namely the interest rate banks charge to their best clients, on Monday and Tuesday.

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The Shibor’s 4.3024 reading was its highest in more than two years, and marked the first time the Shibor had exceeded the prime loan rate since the data series became available in 2013.

Money market rates in China have been rising for months, partly in response to the US Federal Reserve’s heading down a path to raise rates and a steady tightening by the People’s Bank of China. Now the rate rise has started to spread; many banks already have cancelled discounted rates for mortgaged loans. On Friday, regulators demanded higher deposit rates from banks competing for their funds.

The reversed gap between funding cost and interest charges will only accelerate the process for Chinese banks to raise interest rates on loans to home buyers, infrastructure projects and industrial enterprises.

Zhu Min, a former deputy managing director at the International Monetary Fund, said in a speech on Sunday that the US Federal Reserve has started a global liquidity tightening cycle and “a turning point” is emerging, the official Shanghai Securities News reported on its website.

“Interest rates will only go up and will not move downward, and the trend won’t change,” Zhu, a former deputy Chinese central bank governor, was quoted as saying.

When China’s money market rates started to rise in March, the PBOC issued a statement saying rate increases in open-market operations did not equal “benchmark interest rate increases”, in an apparent effort to assuage market concerns over excessive tightening.

The central bank, on the other hand, has steadily increased short-term lending rates in daily market liquidity operations, following the Fed’s rate hikes in December and March.

“The gap of timing between PBOC’s operation to adjust market rates and the Fed’s rate hike is smaller,” said Xie Yaxuan, chief economist with China Merchants Securities.

“The domestic rate hikes are the result of the follow-up moves by the PBOC after the Fed’s rate hikes and also due to the need to manage the economy - such as the need to deleverage and the tighter regulation on banks’ capital adequacy,” Xie said.

China Construction Bank, one of the leading mortgage lenders, removed the discount it had offered to first-home buyers. Agriculture Bank of China, another Big Four state bank, also ended preferential mortgage rates for first-time home buyers. Meanwhile, banks are offering higher deposit rates to woo savers. Industrial and Commercial Bank of China, the largest bank by market capitalization, raised deposit rates 20-30 per cent to attract more deposits.

The central bank’s tightening stance is expected to continue for at least another one to two quarters, meaning China’s rate increases will continue, said Chen Long, an economist with Gavekal Dragonomics.

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“The policy focus this year is curbing property bubbles and cracking down on disorder in financial activities within the banking system,” Chen said.

Derek Scissors, a researcher with American Enterprise Institute, said China should address domestic problems such as the delayed deleveraging.

“The real challenge for China is domestic leveraging, not capital outflow … A lot of money is being wasted. That’s the real challenge for China. Stop wasting money at home,” he said.