Move follows hike by U.S. Federal Reserve
China raised a key short-term interest rate on Thursday following the U.S. Federal Reserve's move to raise interest rates overnight, which shows continuity of the Chinese central bank's recent policy to use short-term monetary tools instead of adjusting benchmark interest rates, an expert said.
The People's Bank of China (PBOC), China's central bank, increased the interest rate on seven-day reverse repurchase (or repo) agreements by 5 basis points to 2.55 percent, according to a statement on the PBOC's website on Thursday.
The PBOC's move came shortly after the Fed raised U.S. interest rates by a quarter of a percentage point on Wednesday (U.S. time), with at least two more hikes by the Fed anticipated later this year.
E Zhihuan, chief economist at Bank of China (Hong Kong), said that mainland monetary policy has remained highly independent for a long time.
"In 2017, the domestic repo rate was raised by 0.25 percent in total, only one-third of the scale of the U.S. dollar rate hike. I don't think this time the reverse repo rise will have any big influence on China's overall interest rate environment," E told the Global Times on Thursday.
The open market operation is a "normal market reaction" to the Fed's rate rise and is "in line with market expectations," a representative from the PBOC's open market operation division was quoted as saying in the statement.
Zhou Yu, director of the Research Center of International Finance at the Shanghai Academy of Social Sciences, said that the move is also aimed at restraining signs of capital outflows that have emerged recently.
China's foreign currency reserves fell by billion month-on-month to about .13 trillion by the end of February.
Move shows continuity
According to Zhou, the PBOC's move to adjust short-term rates shows a continuity of policy tone despite the change of PBOC governors recently.
"Since 2017, the PBOC has shown a tendency to use open-market operations as an adjustment tool. In December 2017, the PBOC also raised interest rates in its open market operations after the Fed increased its policy rate," Zhou told the Global Times on Thursday.
"The PBOC tends to adjust short-term interest rates as it is more flexible and reversible than changing benchmark interest rates," Zhou said, adding that changing long-term rates would release a signal that the PBOC is tightening its monetary policy, which the government does not want.
China's benchmark one-year lending and deposit rates have remained unchanged since October 2015.
Yuan's calm reaction
The yuan's central parity rate against the U.S. dollar rose by 229 basis points on Thursday, according to PBOC data.
"It is not the first time that the yuan has edged up despite a U.S. dollar interest rate hike, as the influence of market anticipation of the U.S. rise had already been released beforehand," Zhou said.
Ding Jianping, a professor at the Shanghai University of Finance and Economics, said that the dollar hike would not have a big impact on the yuan as China's economic rebound has sound fundamentals. Besides, market concerns about the U.S.' economic prospects are growing, Ding told the Global Times Thursday.
The yuan has appreciated by about 3 percent against the U.S. dollar so far in 2018.
Zhou noted that the yuan's exchange rate in the basket of currencies that make up the IMF's Special Drawing Rights, an alternative reserve asset, has been stable.
Therefore the government won't care too much if the yuan fluctuates a little, Zhou said, adding that the yuan's exchange rate against the dollar has been firm at about 6.3 since early February.