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.


Davos organizer WEF warns of growing risk of cyberattacks in Gulf

Updated 16 January 2019
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Davos organizer WEF warns of growing risk of cyberattacks in Gulf

  • Critical infrastructure such as power centers and water plants at particular risk, says expert
  • Report finds that unemployment is a major concern in Bahrain, Egypt, Morocco, Oman and Tunisia

LONDON: The World Economic Forum (WEF) has warned of the growing possibility of cyberattacks in the Gulf — with Saudi Arabia, the UAE and Qatar particularly vulnerable.

Cyberattacks were ranked as the second most important risk — after an “energy shock” — in the three Gulf states, according to the WEF’s flagship Global Risks Report 2019.

The report was released ahead of the WEF’s annual forum in Davos, Switzerland, which starts on Tuesday.

In an interview with Arab News, John Drzik, president of global risk and digital at professional services firm Marsh & McLennan said: “The risk of cyberattacks on critical infrastructure such as power centers and water plants is moving up the agenda in the Middle East, and in the Gulf in particular.”

Drzik was speaking on the sidelines of a London summit where WEF unveiled the report, which was compiled in partnership with Marsh and Zurich Insurance.

“Cyberattacks are a growing concern as the regional economy becomes more sophisticated,” he said.

“Critical infrastructure means centers where disablement could affect an entire society — for instance an attack on an electric grid.”

Countries needed to “upgrade to reflect the change in the cyber risk environment,” he added.

The WEF report incorporated the results of a survey taken from about 1,000 experts and decision makers.

The top three risks for the Middle East and Africa as a whole were found to be an energy price shock, unemployment or underemployment, and terrorist attacks.

Worries about an oil price shock were said to be particularly pronounced in countries where government spending was rising, said WEF. This group includes Saudi Arabia, which the IMF estimated in May 2018 had seen its fiscal breakeven price for oil — that is, the price required to balance the national budget — rise to $88 a barrel, 26 percent above the IMF’s October 2017 estimate, and also higher than the country’s medium-term oil-price target of $70–$80.

But that disclosure needed to be balanced with the fact that risk of “fiscal crises” dropped sharply in the WEF survey rankings, from first position last year to fifth in 2018.

The report said: “Oil prices increased substantially between our 2017 and 2018 surveys, from around $50 to $75. This represents a significant fillip for the fiscal position of the region’s oil producers, with the IMF estimating that each $10 increase in oil prices should feed through to an improvement on the fiscal balance of 3 percentage points of GDP.”

At national level, this risk of “unemployment and underemployment” ranked highly in Bahrain, Egypt, Morocco, Oman and Tunisia.
“Unemployment is a pressing issue in the region, particularly for the rapidly expanding young population: Youth unemployment averages around 25 percent and is close to 50 percent in Oman,” said the report.

Other countries attaching high prominence to domestic and regional fractures in the survey were Tunisia, with “profound
social instability” ranked first, and Algeria, where respondents ranked “failure of regional and global governance” first.

Looking at the global picture, WEF warned that weakened international co-operation was damaging the collective will to confront key issues such as climate change and environmental degradation.