(Corrects term in paragraph 23 to "6-month" from "6-year", adds
new one-year MLF rate)
* China has moved to tighter policy bias as economy improves
* Government has pledged to tackle risks from sharp rise in
* Cbank raises rates on reverse repos, short- and mid-term
* Rate rises small, PBOC says not same as benchmark policy
* Analysts see more modest increases in money market rates
By John Ruwitch and Winni Zhou
SHANGHAI, March 16 China's central bank raised
short-term interest rates on Thursday in what economists said
was a bid to stave off capital outflows and keep the yuan
currency stable after the Federal Reserve raised U.S. rates
The increase in rates was China's third in as many months,
and came a day after the end of the annual session of parliament
where leaders warned that tackling risks from a rapid build-up
in debt would be a top policy priority this year.
Hours earlier, the Fed raised its benchmark policy rate, as
had been widely expected, and signalled more hikes were on the
way as the U.S. economy picks up steam.
"The timing says it all. China is no longer insulated from
the Fed and, more generally, from international financial
conditions," said Alicia Garcia Herrero, chief Asia Pacific
economist at Natixis.
The People's Bank of China (PBOC) has left its benchmark
lending rate unchanged since an October 2015 cut, and said
specifically that Thursday's action should not be seen as
full-blown policy tightening, like that of the Fed.
But analysts and investors believe the PBOC is increasingly
using money market rates and other policy tools as it struggles
to contain financial risks from years of debt-fuelled stimulus
and raise the costs for speculators betting against the yuan.
China's banks tend to rely heavily on short-term, interbank
lending, which connect strong banks with weaker counterparts and
shadowy lenders. The PBOC has been allowing repo rates to rise
since late 2016 by adjusting the amount of funds it injects.
"The higher U.S. rates and tightening of U.S. monetary
policy could trigger further capital outflows and have some
negative impact on China's financial system," Nomura economist
Yang Zhao said.
"I think they want to stabilise the currency at this time."
The PBOC also strengthened the yuan's daily mid-point
reference rate by the most in about two months on
Thursday. The yuan ended the day up 0.2 percent.
But benchmark 10-year treasury futures closed at their
highest in over two months, as a big central bank cash injection
calmed market jitters after the rate rises.
Last year the yuan fell 6.5 percent against a
resurgent dollar and uncertainty over China's economy, prompting
the government to clamp down on capital outflows to ease a drain
on its foreign exchange reserves.
The yuan has been largely stable this year as the dollar has
paused, but China's government has remained alert as many market
watchers expect the dollar will eventually resume its climb.
STRONGER ECONOMY GIVES POLICYMAKERS MORE ROOM
After years of super-loose policy, the PBOC has cautiously
shifted to a modest tightening bias in recent months, though it
is treading cautiously to avoid hurting growth. The economy is
on steadier footing now, giving policymakers more room.
PBOC Governor Zhou Xiaochuan said on Friday that China's
corporate debt levels are too high but stressed it will take
time to bring them down to more manageable levels.
In keeping with that cautious approach, most of the
increases on Thursday were a very modest 10 basis points (bps),
or a tenth of a percentage point, the same as moves in various
short- and mid-term policy instruments in January and February.
The rate on open market operation reverse repos for seven-,
14- and 28-day tenors was bumped up for the second time in six
weeks, with the seven-day rising to 2.45 percent.
The PBOC insisted the moves did not indicate a change in its
monetary policy, though some economists say the seven-day
reverse repurchase rate has become a de facto policy rate.
Flexibility in rates is favourable for deleveraging,
"deflating bubbles" and risk prevention, the PBOC said.
"(The market) does not need to over-interpret the amount and
price of each operation," it said. "Changes in rates are normal
and do not indicate a change in direction for monetary policy."
Economists expect further modest hikes in the seven-day rate
over the course of the year, with ANZ expecting another 20 bps
rise by year-end and London-based Capital Economics forecasting
another 55 bps.
The weighted average rate for the seven-day reverse repo
rose to 2.7641 percent, from Wednesday's 2.5697 percent.
CASH INJECTIONS TO CALM THE NERVES
The PBOC also raised the borrowing rate on its medium-term
lending facility (MLF) loans, with the six-month rate now 3.05
percent and the one-year at 3.20 percent, after a similar move
in late January. The MLF is a supplementary policy tool it uses
to manage liquidity conditions in the banking system and money
Completing the daily triple-play, sources said the PBOC also
raised rates on its standing lending facility (SLF) short-term
loans later in the day.
The rate increase for overnight SLF loans was twice that of
the other instruments at 20 bps, possibly signalling concern
that very short-term funding was still being used in riskier
ways despite pledges of a crackdown. The PBOC had no immediate
The central bank also injected a large amount of fresh funds
into the financial system to maintain liquidity.
It lent 113.5 billion yuan ($16.47 billion) of six-month MLF
loans and 189.5 billion yuan of one-year MLF loans to 17
financial institutions on Thursday.
Economists polled by Reuters earlier this year expected
China would keep its benchmark lending rate steady through at
least the second quarter of 2018.
($1 = 6.8917 Chinese yuan renminbi)
(Additional reporting by Elias Glenn in BEIJING; Editing by Kim