Shift from monetary policy easing to tightening
The central bank hiked the interest rate on some of its reverse repo agreements by 10bp. The offered reverse repo rate can be thought of as a floor for the money market rate, the repo rate. The central bank also hiked the interest rate on its standing lending facility. The attempt to guide money market rates higher is probably meant to dampen the still rapidly growing overall debt level and especially the vast shadow banking credit. As such, the interest rate hikes are a sign that the tide has turned and that the authorities are now tightening rather than easing monetary policy. That in turn implies that the authorities should be a little less keen on keeping economic growth high at any cost. The policy shift is, however, not a sign that monetary policy will be tightened dramatically ahead.
No dramatic monetary policy tightening ahead
First of all, the benchmark lending rates have not been hiked. Only a few years ago, the 1-year lending rate was the main policy rate. It was the interest rate at which commercial banks lend out, a rate that was directly controlled by the central bank. Following interest rate liberalisation, the rate has lost importance, but many loans are still contractually tied to the official benchmark lending rates. Thus, a hike of the 1-year benchmark lending rate would have been a much stronger sign of a shift in the policy stance toward tightening. The money market rate hikes come as the liquidity situation should normalise following the end of the Lunar New Year holidays. A lot of liquidity was injected ahead of the holidays as the demand as usual soared when lots of Chinese travel during the holidays. Another reason for wanting higher money market rates but not necessarily tighter overall monetary policy is a desire to increase the interest rate spread to the US (where the rate hiking cycle has been kicked off) to dampen capital outflows.
PMI from Markit signals growth will slow even without higher interest rates
The reason why we do not expect dramatically tighter monetary policy is also that we expect economic growth to start declining gradually again soon, even in the absence of monetary tightening. The manufacturing PMI from Markit gave the first indication that the 2016 mini-cycle likely has peaked when it declined more than expected from 51.9 in December to 51.0. The increasing growth in 2016 has primarily been a consequence of the ongoing boom in the property market. The property bubble has already started to deflate, until now in an orderly manner, due to the authorities’ recent measures to dampen price increases in cities where the housing market looks the most frothy. Another reason why we see growth slowing again into 2017 is that the tax break on cars (primarily energy-efficient ones), which has boosted car sales, has been scaled back.