China raises a key market interest rate, following Fed’s move

Beijing is expected to tighten financial regulations to counter market trends. (Reuters)
Updated 23 March 2018
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China raises a key market interest rate, following Fed’s move

SHANGHAI: China gingerly raised a key short-term interest rate on Thursday following the US. Federal Reserve Bank’s move overnight, in a symbolic reminder that Beijing is keeping an eye on global market trends even as it cracks down on financial risks at home.

The People’s Bank of China (PBOC) said it had increased the rate on 7-day reverse repurchase agreements by 5 basis points (bps) to 2.55 percent. Reverse repos are one of its most commonly used tools to control liquidity in the financial system.

The Fed raised US interest rates by 25 bps, or a quarter of a percentage point, on Wednesday and forecast at least two more hikes for 2018.

The PBOC’s move had been widely expected and was its first major policy decision under new Governor Yi Gang, who was appointed by parliament on Monday as part of a sweeping reshuffle of China’s cabinet under ever-stronger President Xi Jinping.

“I think it’s just a symbolic rate hike again to avoid the China-US rate spread from widening too much,” said Ken Cheung, senior FX strategist at Mizuho Bank in Hong Kong.

“A 5 bps hike is enough because yuan depreciation is not a big concern. And the PBOC is refraining from lifting rates aggressively amid the regulation reform and benign inflation pressure.”

The PBOC also injected 10 billion yuan ($1.58 billion) into the financial system on Thursday.

Many market watchers had expected the PBOC to follow a Fed hike with a 5-10 bps increase in the borrowing cost for Chinese interbank loans.

That would keep the US-China rate differential from getting too wide — which would risk a resurgence in capital outflows from China.

But analysts said the move was also a signal to banks and other financial institutions that the government is pressing ahead this year with its campaign to reduce risks in the financial system.

Capital Economics said in a note that it believed the rate hike was an effort by the PBOC to show it would follow the Fed to minimize outflows and prevent a yield gap blow-out.

But the consultancy added that the PBOC may revert to looser monetary conditions in coming quarters if economic activity cools more than expected.
The PBOC had similarly inched up some rates after the Fed hiked its policy rate last March and December.

It began nudging up short-term market rates and those of its other liquidity tools in early 2017 as authorities’ clampdown on riskier financing practices kicked into higher gear, but it has moved cautiously to avoid a hit to the economy.

In a statement, the PBOC said the rate increase was a normal response to the Fed’s move that would help shape interest rate expectations and guide “reasonable” growth in credit.

The PBOC also raised rates on its standing lending facility (SLF) short-term loans by 5 bps, three sources with direct knowledge of the matter said.

With global markets expecting more monetary tightening in the US, economists think China will raise market rates again, although there is no clear consensus on how high they may go.

Nie Wen, an economist at Hwabao Trust in Shanghai, expected the PBOC to raise market rates by a total of 25 bps this year, but possibly as much as 50 bps if consumer inflation in China rises above 3 percent.

Economists at ANZ expect the 7-day reverse repo rate to rise another 30 bps this year as the PBOC continues with a tightening bias.

However, much of the official focus this year is expected to be on a continued tightening of the regulatory screws, with a flurry of measures already announced in the last few months.

Some market watchers also expect the PBOC to start moving benchmark rates again, but said the move would be asymmetric, with only the deposit rate rising to haul negative real deposit rates above the water line.

The PBOC has not changed its benchmark one-year lending and deposit rates since October 2015, with the central bank preferring to guide borrowing costs via liquidity operations and interbank market rates.

“On the one hand, the PBOC needs to push up the interest rate in the domestic financial market, so as to curb domestic financial speculation and prevent capital outflow,” said Chaoping Zhu, global market strategist at J.P. Morgan Asset Management.

“On the other, given the probability of a correction in asset prices and the potential for economic slowdown, it is not an optimal choice to adjust up the benchmark deposit and lending rates. Therefore, increasing the 7-day reverse repo rate provides the PBOC with the flexibility to control market liquidity and financing costs.”

Analysts polled by Reuters expect China’s GDP growth to slow to 6.5 percent this year from 6.9 percent in 2017, pressured by higher borrowing costs and cooling investment in the property market.


First Abu Dhabi Bank to start commercial banking in Saudi Arabia this year

Updated 24 min 22 sec ago
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First Abu Dhabi Bank to start commercial banking in Saudi Arabia this year

  • FAB is the latest foreign bank attracted by openings in Saudi Arabia
  • It had already completed its first debt capital markets transaction in the kingdom through its investment banking business

DUBAI: First Abu Dhabi Bank (FAB), the largest lender in the UAE by assets, said on Monday it will launch commercial banking operations in Saudi Arabia by the end of this year.
The bank, which was granted a commercial banking license in Saudi Arabia earlier this year, has been expanding its staff in the kingdom as it seeks to benefit from the government’s drive to move the economy beyond oil revenues.
It appointed Abdullah Abubakr as head of private banking in Saudi Arabia as of this month, according to his LinkedIn page.
FAB did not respond to a request for comment on his appointment.
FAB is the latest foreign bank attracted by openings in Saudi Arabia. The bank said it had already completed its first debt capital markets transaction in the kingdom through its investment banking business. In February, it was granted a license to conduct arranging and advising activities in the securities business. The bank also on Monday reported a 16 percent rise in third quarter net profit as net interest income and fees and commissions edged higher.
FAB made a net profit of 3.02 billion dirhams ($822 million) in the three months ending Sept. 30, up from 2.61 billion dirhams in the prior-year period, it said in a statement. SICO Bahrain had forecast FAB’s quarterly profit at 2.87 billion dirhams.
FAB’s performance was helped by lower net impairment charges during the quarter, with impairments falling 23 percent to 435 million dirhams. Loans and advances rose to 354 billion dirhams as of Sept. 30, up 8 percent from the same period of last year. Deposits totaled 455 billion dirhams, up 20 percent from a year earlier.