Article Highlights

  • PBOC keeps interest rates on reverse repos unchanged
  • Markets had expected 5-10 bps move from PBOC after a Fed hike
  • Shrinking yield gap between U.S. and China might not be a concern - analyst
  • May data shows China's economy losing momentum
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China’s central bank left borrowing costs for interbank loans unchanged on Thursday, a surprising decision that shrugged off the U.S. Federal Reserve’s policy rate increase and came as data showed the world’s second-biggest economy lost more steam than expected.

The People’s Bank of China’s (PBOC) on-hold stance highlighted uncertainty about the economic outlook as policy makers try to steer through the challenge of a trade spat with the United States and a government-led clampdown on debt.

U.S. President Donald Trump is set to meet with his top trade advisers on Thursday to decide whether to activate threatened tariffs on billions of dollars in Chinese goods.

The rate for seven-day reverse repurchase agreements remained at 2.55 percent, the 14-day tenor at 2.70 percent and the 28-day tenor at 2.85 percent, the PBOC said in a statement on its website.

Reverse repos are one of its most commonly used tools to control liquidity in the financial system.

Analysts had expected the PBOC to follow the Fed to increase interest rates modestly – as it has tended to do – to keep the spread between Chinese and U.S. yields stable, reducing the risks of potential capital outflows that could pressure the yuan currency.

“But now it seems the PBOC no longer needs to stabilize the currency,” said Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong.

“May economic data have showed weakness in the economy. I believe they would choose not to raise the interest rates now in order to keep the economic growth momentum.”


China reported weaker-than-expected activity data for May, adding to views the economy is finally starting to slow under the weight of a prolonged crackdown on riskier lending that is pushing up borrowing costs for companies and consumers.

Beijing is into the third-year of a sweeping regulatory clampdown on riskier lending practices. Intensifying concerns over credit quality in China after a spate of corporate bond defaults over the past few months have also put the focus on finiancial stability.

The yuan has strengthened about 1.7 percent against the dollar so far this year, on top of gains of about 6.8 percent in 2017.

In March, China gingerly raised market rates following the U.S. move, in a symbolic reminder that Beijing is keeping an eye on global market trends.

Policy makers are also balancing those moves by taking the brakes off some liquidity controls. Markets expect the PBOC to make another cut in banks’ reserve requirement ratios (RRR) in the second half, with some speculation it could come as early as this month or July.

The PBOC’s surprise RRR cut in April and fears of a trade war with the United States have fanned market expectations that it may loosen policy to support the economy.

The Fed on Wednesday raised U.S. interest rates by a quarter of a percentage point for the second time this year, and is expected to hike twice more in 2018.

The PBOC has kept its benchmark one-year lending and deposit rates steady since October 2015.

The central bank injected a net 70 billion yuan via reverse repos in open market operations on Thursday, according to the statement.