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.