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China Responds, Hikes Rates After Fed

As a reminder, they're prone to doing this.

Well, here we go with the tit-for-tat rate hikes between the Fed and the PBoC.

China just hiked OMO rates, marking the first such decision under Yi Gang.

Specifically, they sold 10b yuan of 7-day reverse repos at 2.55% – that’s up from 2.5% in the previous operation.

 

As a reminder, they’re prone to doing this and the PBoC wants you to know that the move is “in line with market expectations” and is designed to “help limit irrational financing and stabilize the overall leverage ratio.” That’s according to a statement.

The idea is generally to make sure there’s not a widening policy divergence that ends up undercutting the yuan and/or shrinking the yield premium over Treasurys and/or stoking capital flight. Additionally, using money market rates is a way to manage the deleveraging effort without resorting to hiking benchmark rates which could threaten the “real” economy.

Just prior to the announcement, Haitong Securities suggested the PBoC needn’t follow the Fed this time “because the strength of the yuan means there’s less need to protect the currency.” It looks like they didn’t want to take that chance. Of course they needn’t have worried – the dollar fell after Jerome Powell’s presser.

Also bear in mind that this comes as China could consider using the yuan as a weapon should Trump get too aggressive with the protectionism.

USDCNH

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