China’s Market News: The PBOC Tightens Liquidity Through MLF Rate Hikes

This daily digest focuses on Yuan rates, major Chinese economic data, market sentiment, new developments in China’s foreign exchange policies, changes in financial market regulations, as well as market news typically available only in Chinese-language sources.

– The PBOC lifted 6-month and 1-year MLF rates on Tuesday, the first time in nearly six years.

– China’s fiscal deficit in 2016 came in greater-than-expected and will likely continue to widen in 2017.

Yuan Rates

– The PBOC strengthened the Yuan by +241 pips or +0.35% against the U.S. Dollar on Tuesday, the highest level for the Yuan fix since November 14th, 2016. The offshore Yuan remained stronger than the guided level, with the USD/CNH trading at 6.8112 as of 12:00 PM EST; the onshore Yuan was weaker than both the offshore Yuan and the Yuan fix, with USD/CNY trading at 6.8554.

USD/CNH 1-Day

Prepared by Renee Mu.

- China’s Central Bank raised two interest rates on January 14th, the first time of such increases in nearly six years: the lending rates for 6-month and 1-year Medium-term Lending Facility (MLF) have been both lifted by +10 basis points to 2.95% and 3.10% respectively. These adjustments are intended to stabilize liquidity in the banking system, according to a statement by the PBOC.

Data downloaded from Bloomberg; chart prepared by Renee Mu.

The move may be a surprise for some market participants, as normally, the regulator would increase injections as it approaches to the Chinese New Year when liquidity tightens. However, we discussed that China’s Central Bank has started to tweak its credit strategy by increasing the average cost and the lending term of funds since last August. Also, China’s monetary policy in 2017 has changed to “prudent and neutral” from “prudent” in 2015 and 2016; the liquidity target in 2017 changed to “maintaining liquidity basically stable” from “keeping liquidity reasonably ample” stated in 2015 and 2016. Adjustments on MLF rates on Tuesday are regulator’s move following these revised targets. Amid the unsolved risk in price bubbles, we may see additional tightening measures from Chinese regulators over the following periods.