When the Fed last hiked rates by 25bps in March, China's central bank followed suit almost immediately by engaging in a "soft" hike, raising the rate on its various reverse repo operations by 10bps. But not this time: when the PBOC announced its daily reverse repo operation last night, which saw a net injection of CNY 90 billion in the market, traders were only looking at one thing: whether the PBOC would again raise rates on its various reverse repos. It did not, and as we remarked last night, the PBOC instead kept all open market operation rates unchanged at 2.45%; 2.6%; 2.75% for 7/14/28 day repo...
As JZ Securities' chief economist Deng Haiqing summarized, the PBOC’s decision not to follow Fed is "significantly great news" for bonds.
Why did PBOC chair Zhou Xiaochuan "break stride" with Yellen? For one, it is possible he is simply late - after the Fed raised rates in December, the PBOC didn’t follow suit until February.
However, this time, Bloomberg thinks the split may be for real: it suggests "Zhou sees more autonomy to address domestic challenges, with the yuan holding stable and tighter capital controls keeping outflows at bay. More independence allows China’s policy makers to shrug off Fed tightening for now, as there are already signs growth will slow in coming quarters amid curbs aimed at cooling the property market."
Helping the PBOC's "independence" is the recent blow out in spreads between China and the US. The yield gap between U.S. and Chinese 10-year sovereign bonds widened to a two-year high of 150 basis points on June 6, compared with less than 90 on March 15. That means there’s less appeal for moving money to the U.S, easing the pressure on outflows...
Of course, that in itself is hardly a glowing sign of Chinese stability: surging rates mean that Chinese corporations face their own day of default reckoning as they seek to rollover billions in short-term debt among Beijing's ongoing effort to deleverage the economy. However, for the PBOC that bridge will be crossed when the time comes.
Another potential reason for the PBOC's decision is that it believes its capital controls are sufficiently sturdy to prevent further capital flight. The PBOC charting its own course "protects China from being exposed to uncontrollable risks" said Lu Zhengwei, chief economist at Industrial Bank Co. in Shanghai. "The central government would like to press ahead with deleveraging, and it wants to ensure the process is smooth and stable. Capital control measures have allowed them to do so."
Also opining on the decision, Ming Ming, a former central bank monetary policy official told Bloomberg tgat "the PBOC raised rates in March because it wanted to curb financial leverage, and now it doesn’t have that intention as previous measures have already proven quite effective."
The good news, if only for now, is that the Fed's policy does not have instantaneous global implications. "Fed decisions are becoming less influential to China’s monetary policy now than at the beginning of the year," said David Qu, an economist at Australia & New Zealand Banking Group Ltd. in Shanghai. "That allows policy makers to focus more on challenges at home."
Then again, looking at the red among equities morning, including the drop in Chinese markets and commodities, the PBOC may be dragged right back in as it eventually finds it has no choice but to follow in Yellen's footsteps....