Beijing follows Fed with rate hike with eye on cashflows

China on Thursday raised the amount it charges lenders to borrow cash as it looks to prevent cash outflows after the Federal Reserve's latest interest rate hike. With the Fed embarking on a period of monetary tightening as the economy continues to strengthen, Beijing has sought to stop a tide of money leaving the country as investors seek out better returns in the United States.
It also comes as Chinese authorities try to address a huge debt pile that many commentators have warned could hit the economic powerhouse and possibly spark another global crisis. The People's Bank of China (PBoC) said on its website the 0.05 percentage point lift in the seven-day reverse repurchase agreement "matches expectations, and is a normal response to the US Federal Reserve's interest rate hike".
It announced similar moves in December and March last year in response to a US increase. "We don't interpret this as a move to tighten monetary conditions," said Julian Evans-Pritchard, China Economist at Capital Economics in a note, adding the central bank sets liquidity from its lending operations and interbank rates. "There is nothing to prevent the PBoC from stepping up its injections and pushing market rates lower, even as it hikes" the reverse-repo rate, Evans-Pritchard said.
Earlier, Hong Kong's de-facto central bank also announced a rate hike, as is customary owing to the city's monetary policy link to the United States' via their currency peg. The Hong Kong Monetary Authority lifted its base rate by 25 basis points to 2.0 percent. However, there are growing concerns officials may be forced to step into money markets to support the Hong Kong dollar owing to a divergence of key rates between the two.
While the HKMA lifts borrowing costs alongside the Fed, it has little effect as a huge well of cash in the city's banking system means lenders have ample liquidity, keeping the crucial Hong Kong Inter-Bank Rate (HIBOR) at record lows. With US rates continuing to rise, investors are therefore selling local dollars and buying the higher-yielding greenback.
"In the long run, (the Fed hike) is going to make the Hong Kong dollar much weaker, unless we are going to increase the interest rate to protect that," said Jackson Wong, an associate director at Huarong International Securities. He said major lenders in the city had not lifted their rates in line with the HKMA yet, adding that they "are not in a rush to increase interest rates right away".