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China Raises Interest Rates on Open Market Operations, Standing Lending Facility

By Wu Hongyuran and Dong Tongjian

(Beijing) — China’s central bank has surprised the financial markets by raising interest rates on its open market operations and its standing lending facility (SLF) in its latest attempt to reduce financial leverage in the market.

On Friday, the People’s Bank of China raised the overnight interest rate on its SLF liquidity management tool to 3.1% from 2.75%. The seven-day rate was increased to 3.35% from 3.25%, and the 30-day rate was hiked to 3.7% from 3.6%, sources close to the central bank told Caixin.

Meanwhile, the central bank raised the interest rates of the seven-, 14- and 28-day reverse repo agreements by 10 basis points on Friday, according to its website.

The move followed the weeklong Chinese New Year holiday, which usually marks the end of seasonally tight liquidity in the financial system. It also indicates the central bank’s intention to curb financial leverage by tightening monetary policy amid growing property-market bubbles and rising credit loans.

While the interest-rate hikes on the central bank’s open market operations and SLF were not unexpected, the large 35-basis-point increase on the SLF’s overnight interest rate was quite a surprise, according to a source in the banking industry. He said that the move indicates that the central bank aims to cut debt while guarding against liquidity risks.

This is a view echoed by other financial professionals who agree that the central bank is experimenting with offsetting potential risks related to higher interest rates with conditional liquidity supply.

The SLF interest rates are the ceiling of the central bank’s interest rate corridor, a bond analyst said, adding that the increase coupled with the rise in reverse repo costs demonstrates the interest rates acceptable to the central bank have become much higher.

In addition, financial institutions face an additional 100-basis-point hike on SLF rates if they fail to meet the monetary authority’s Macro Prudential Assessment system, a framework adopted by the central bank at the beginning of 2016 to gauge risks in bank-credit exposure, according to sources from China’s large commercial banks.

A banking industry analyst said the punitive interest rates hike could be taken as a forerunner of a rise in the money market rate.

Contact reporter Dong Tongjian (tongjiandong@caixin.com)

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