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Financial News: PBoC Lifts Short-Term Interest Rates Signaling Tightening

PBoC Lifts Short-Term Interest Rates Signaling Tightening

02/03/2017 - 02:10:00 (RTTNews)

(RTTNews) - The People's Bank of China unexpectedly raised its interest rates on open market operations and funds provided through Standing Lending Facility on Friday, adding to speculation of further tightening ahead.

Elsewhere on Friday, survey results from IHS Markit showed that China's manufacturing activity growth slowed slightly at the start of 2017 as output and new orders expanded at weaker rates.

The central bank raised the 7-day reverse repo rate by 10 basis points to 2.35 percent. Similarly, the 14-day reverse repo rate was lifted to 2.5 percent.

The 28-day repo rate was also increased by 10 basis points. All new rates take effect on February 3.

The overnight rate for the Standing Lending Facility loan was hiked to 3.1 percent from 2.75 percent. The tightening measure is set to control the over-leveraging of Chinese corporates.

In January, the bank had lifted the rates on the medium-term loan facility, which was the first such move since 2011.

The Caixin Purchasing Managers' Index for the factory sector dropped more-than-expected to 51.0 in January from December's 47-month record of 51.9, the survey revealed.

The score was forecast to ease marginally to 51.8. Nonetheless, a reading above 50 indicates expansion in the sector.

Manufacturers reported another rise in client demand, as highlighted by a sustained growth in new orders. Nonetheless, the pace of expansion slowed from December's recent peak despite a renewed upturn in new export business.

Reflecting the trend in new orders, production advanced at the slowest rate since last September.

Efforts to reduce costs contributed to a further fall in manufacturing employment in January. Consequently, the rate of job shedding quickened to its strongest in three months.

A lack of staff amid higher new orders led to a further increase in the amount of backlogged work. With production rising at a softer pace, growth in purchasing activity also slowed in January.

On the prices front, Chinese manufacturers faced a further steep increase in input costs, with the rate of inflation easing only slightly from December's recent peak.

As a result, companies raised their prices charged for the eleventh successive month. Though solid, the rate of increase was the slowest seen in the past four months.

Further, the survey showed that Chinese goods producers remained upbeat towards the 12-month outlook for production, with the overall degree of positive sentiment reaching a six-month high at the start of 2017.

"The Chinese economy maintained stable growth in January," Zhengsheng Zhong, director of macroeconomic analysis at CEBM Group, said. "But the sub-indices showed that the current growth momentum may be hard to sustain."

China's economy expanded 6.8 percent in the fourth quarter of 2016 on spending, while the full-year growth hit 6.7 percent, the weakest in 26 years.

Given the clear signs that the property market is cooling and that monetary and fiscal policy have become less supportive, Julian Evans-Pritchard, an economist at Capital Economics, expects economic growth to begin to slow again in the coming quarters.

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