China’s central bank unexpectedly holds fire on rates as economy wobbles

There are views the Chinese 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. (Reuters)
Updated 14 June 2018
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China’s central bank unexpectedly holds fire on rates as economy wobbles

  • 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
  • Beijing is into the third-year of a sweeping regulatory clampdown on riskier lending practices

SHANGHAI: China’s central bank left borrowing costs for interbank loans unchanged on Thursday, a surprising decision that shrugged off the US 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.
US 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 US 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 financial 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 US 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 US 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.


Oil prices up almost 3% as OPEC agrees to raise output

Updated 22 June 2018
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Oil prices up almost 3% as OPEC agrees to raise output

  • Oil prices rose almost 3 percent on Friday as OPEC agreed a modest increase in output to compensate for losses in production at a time of rising global demand.
  • The Organization of the Petroleum Exporting Countries agreed on Friday to boost output from July.

LONDON: Oil prices rose almost 3 percent on Friday as OPEC agreed a modest increase in output to compensate for losses in production at a time of rising global demand.
Benchmark Brent crude jumped $2.19 a barrel, or almost 3 percent, to a high of $75.24 before slipping to around $75 by 1305 GMT. US light crude was $1.80 higher at $67.34.
The Organization of the Petroleum Exporting Countries, meeting in Vienna, agreed on Friday to boost output from July after Saudi Arabia persuaded Iran to cooperate in efforts to reduce the crude price and avoid a supply shortage.
Two OPEC sources told Reuters the group agreed that OPEC and its allies led by Russia should increase production by about 1 million barrels per day (bpd), or 1 percent of global supply.
But the real increase will be smaller because several countries that recently underproduced oil will struggle to return to full quotas while other producers will not be allowed to fill the gap.
The deal looked to be in line with many analysts' forecasts.
Analysts had expected OPEC to announce a real increase in production of 500,000 to 600,000 barrels per day (bpd), which would help ease tightness in the oil market without creating a glut.
"The effective increase in output can easily be absorbed by the market," Harry Tchilinguirian, head of oil strategy at French bank BNP Paribas told Reuters Global Oil Forum.
Oil prices have been on a roller-coaster ride over the last few years, with the international marker, Brent, trading above $100 a barrel for several years until 2014, dropping to almost $26 in 2016 and then recovering to over $80 last month.
The most recent price rally followed an OPEC decision to restrict supply in an effort to drain global inventories.
The group started withholding supply in 2017 and this year, amid strong demand, the market tightened significantly, triggering calls by consumers for higher supply.
Falling production in Venezuela and Libya, as well as the risk of lower output from Iran as a result of US sanctions, have all increased market worries of a supply shortage.
Another big uncertainty for oil is the escalating dispute between the United States and its trading partners, which could hit US crude oil exports to China.
Asian shares hit a six-month low on Friday as tariffs and the US-China trade battle start taking their toll.
If a 25 percent duty on US crude imports is implemented by Beijing, American oil would become uncompetitive in China, forcing it to seek buyers elsewhere.
Chinese buyers are already starting to scale back orders, with a drop in supplies expected from September.