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China's Central Bank Raises Market Rates Hours After Fed Move

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12/14/2017 | 07:45am CEST

BEIJING--China's central bank followed a U.S. interest-rate increase with one of its own to blunt the effect of the Federal Reserve move on the Chinese economy, which cooled further in November.

The People's Bank of China on Thursday raised two key short-term interest rates, hours after the U.S. Fed's third interest-rate increase this year. Economists say they expect the world's second-largest economy to feel more pains of soaring funding costs in 2018. Fed officials have penciled in three quarter-point rate increases for the year and two such increases each in 2019 and 2020.

The Chinese central bank raised the rates it charges commercial banks on seven-day and 28-day loans by 0.05 percentage point each. It also raised rates for a medium-term liquidity instrument. The increases were smaller than 0.10 percentage-point moves in the first quarter, and the bank left the benchmark policy rates unchanged.

The moves indicate that China's policy makers are trying to strike a balance between easing pressure on the yuan and reducing capital flight on one hand, and managing higher borrowing costs on the other.

The PBOC also injected 288 billion yuan ($43.52 billion) of liquidity into the banking system on Thursday to offset the effects of the rate increases.

"The rate increases by the PBOC risk exerting more pressure on the Chinese economy, which is widely expected to slow down in 2018 amid a cooling property market and slackening export demand," said Liu Xuezhi, an economist with Bank of Communications.

The Chinese economy has already showed signs of softness in the final quarter of the year. Growth in China's industrial output, a rough proxy for economic expansion, decelerated for a second straight month to 6.1% in November, compared with a 6.2% increase in October, according to data from the National Bureau of Statistics on Thursday.

While there was a clear pickup in external demand last month, industrial production was likely hurt by an antipollution crackdown in the country's northeast, said Julian Evans-Pritchard, an economist with Capital Economics.

Growth in fixed-asset investment slowed for a fifth straight month to 7.2% in the first 11 months of 2017 from a year earlier, compared with a 7.3% increase over the January-October period.

The deceleration last month was mainly due to slower property investment. Such investment, including commercial and residential real estate, grew 7.5% in the January-November period, compared with a 7.8% rise in the first 10 months of the year.

Retail sales, one of the bright spots in the Chinese economy this year, also came in lower than expectations at 10.2%. Economists expected a 10.3% increase given record online sales on the "Singles Day" shopping spree midmonth.

China observers earlier this year had estimated a significant slowdown in growth after aggressive moves to reduce excessive borrowing and restrict home speculations. Instead, the Chinese economy grew 6.9% in the first half and only lost steam slightly in the third quarter.

Economists attribute the unexpected strength to strong home sales, more government spending on infrastructure projects and robust global demand for Chinese goods. But with additional interest-rate increases and continued tightening in the market, the economic outlook may dim, Mr. Liu with Bank of Communications said.

OCBC economist Tommy Xie said the PBOC's rate increase showed that Fed policy is still one of the parameters for Beijing's policy.

"The adjustment of China's money-market-rate increase will continue to remind investors that financial deleveraging is a long-haul project for China," said Mr. Xie.

However, due to the concerns around growth, economists say a benchmark-rate increase, in addition to Thursday's market-rate increases, is unlikely as it would lift borrowing costs for all bank loans.

Grace Zhu and Shen Hong

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