China’s central bank tightens policy rates to save economy from overheating

After years of easy money policy, China's central bank is tightening its hold by raising interest rates it charges in open-market operations and on funds lent via its Standing Lending Facility in a bid to rein in credit growth and avoid overheating of the economy.

The People's Bank of China increased the costs of seven-, 14- and 28-day reverse repurchase agreements by 10 basis points each to 2.35 percent, 2.5 percent and 2.65 percent respectively, according to a statement on its website. This is the first increase since 2013 for the two shorter tenors, and the first such move since 2015 for the 28-day contracts.

The SLF rate was increased to 3.1 per cent from 2.75 per cent, reports quoting sources close to the development said.

The moves come at a lean demand period for cash after the week-long Lunar New Year holidays and follows an increase in rates on medium-term loans last week. The PBOC is midway through a policy overhaul and officials have signalled in the past of a repo rates guided floor and SLF rates linked ceiling for policy rates.

One-year interest-rate swaps climbed as much as 12 basis points to 3.43 per cent, the highest since 28 December, while the seven-day repurchase rate pared declines to 13 basis points to trade at 2.50 per cent, according to a weighted average.

Ten-year government bonds were little changed, while Shanghai shares extended losses to 0.6 per cent.

The PBOC's move is expected to send Chinese bonds into a technical bear market, Tighter policy aims to further deleveraging, prevent an overheating in credit growth and widen the yield advantage Chinese bonds have over U.S. debt, thereby supporting the yuan.