PBOC Seen Holding Rates Post Fed Hike Amid Stable Yuan, Bond Gap

(Bloomberg) -- The People's Bank of China will refrain from raising open-market interest rates even if the U.S. Federal Reserve decides to increase borrowing costs next week, according to a Bloomberg survey.

More than 80 percent of 32 economists, analysts and traders said that the PBOC will maintain its current rates on reverse-repurchase agreements, which guide the cost of funding in financial markets. Four forecast an increase of 10 basis points and one expects a hike of 15 basis points. The official benchmark rate for the broader economy has been on hold since late 2015.

Investors anticipate the Fed will boost its benchmark lending rate a quarter-point to a range of 1.25 to 1.5 percent when it meets from Dec. 12. The PBOC refrained from raising borrowing costs in June after a Fed hike, a switch from March when it increased money-market costs hours after its U.S. counterpart tightened.

Recovering sentiment on the yuan, the biggest yield gap in more than two years between U.S. and Chinese 10-year sovereign bond yields, and still-moderate inflation offer ample breathing room for policy makers as 2017 comes to a close. Holding for now helps avoid market volatility too, as interbank rates have already risen strongly this year amid a renewed pledge to curb risks and tighten regulation.

Still, abstaining from a rate increase fuels risks of yuan depreciation, especially in an environment where a prospective U.S. tax cut may lead to some capital repatriation. Emerging-market portfolio flows turned sharply negative in late November in anticipation of the tax deal that emerged earlier this month, according to analysis by the Institute of International Finance.

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China's open market interest rates are becoming a de-facto benchmark, so moving it is "sensitive", said Shi Lei, chairman of Attractor Adviser Ltd., an advisory group in Shanghai. "China pays more attention to domestic economic fundamentals in terms of monetary policy. There's no necessity for a hike as inflation won't be very high next year, and the financial system is tightening," he said.  

Even without an official interest-rate hike, interbank rates are likely to climb because of year-end demand, tougher PBOC oversight and macro-prudential policies. The nation's seven-day repurchase rate -- the money-market benchmark -- will reach 3.1 percent this month, according to the median estimate of economists in the Bloomberg Survey. That compares with an average of 2.89 percent in November.

Steady Yield

The year-long bond market rout is seen cooling though. The yield on 10-year China government bonds is likely to end the year at 3.90 percent, and that on China Development Bank notes of similar maturity at 4.80 percent, according to the median estimate, both around the current levels.

To be sure, as deleveraging efforts may intensify next year, the PBOC could increase market rates if officials consider that other policy measures, like macro-prudential policy, aren't sufficient.

"Emerging market economies should also start monetary policy normalization and exit easing measures being put into place to deal with financial crisis," Sun Guofeng, director of PBOC's financial research institute, said Tuesday at a forum in Beijing.

Sun's comments, along with the fact that the PBOC only rolled over half of the Medium-term Lending Facility maturing this month, indicate there's a "high probability" that the central bank will follow the Fed by raising MLF interest rates, analysts led by Ming Ming at Citic Securities Co. wrote in a report on Thursday.

--With assistance from Xize Kang Shuqin Ding Mengchen Lu and Heng Xie

To contact Bloomberg News staff for this story: Yinan Zhao in Beijing at yzhao300@bloomberg.net, Helen Sun in Shanghai at hsun30@bloomberg.net, Ling Zeng in Shanghai at lzeng30@bloomberg.net, Cynthia Li in Hong Kong at cli205@bloomberg.net.

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, Robin Ganguly, Jeff Kearns

©2017 Bloomberg L.P.

With assistance from Yinan Zhao, Helen Sun, Ling Zeng, Cynthia Li