During the process of gradual interest rate hikes in the United States, various interest rates in the Chinese market also rose slowly. China's interest rate rise reflects the domestic economic upturn, in addition to reflecting the global climb in the rate of return.
U.S. Government Will Continually Raise the Federal Funds Rate
On June 15th, the U.S Federal Open Market Committee (FOMC) announced a monetary policy statement, showing that the FOMC decided to raise federal funds rate target range from 1% to 1.25%. The federal funds rate is the interbank interest rate, the FRB maintains the interbank interest rate in the intended target area through the sale of government bonds in the public market.
The FOMC announced that they expect the development of economic conditions will allow it to justify the federal funds rate, but the reality of the federal funds rate change will depend on the economic outlook shown by future data. In a Q&A session, the FRB chairwomen further indicated their future expectations: the benchmark interest rates this year and next year will continue to be improved.
From the end of 2015 to June 15th, 2017, the FRB has raised the federal funds rate four times, ranging from 0-0.25% to 1% - 1.25%.
China's Central Bank Operating Rate is Also Climbing
China's central bank open market bond transactions, include repurchase transactions, spot trading, and the issuance of central bank bills. Among them, the repurchase transactions are divided into two categories, a regular repurchase and reversed repo operations. A regular repurchase is when the central bank collects liquidity operations from the market, while the reversed repo operation is when the central bank releases the liquidity operations to the market. In addition, the central bank also manages liquidity through standing lending facilities (SLF) and medium-term lending facilities (MLF).
With the U.S. interest rate increase process, the Chinese central bank operating interest rates are gradually adjusted or adjusted for adaptation. On January 20th, 2017, the 7-day reverse repo rate was raised from 2.25% to 2.40%. On March 16th, coupled with increasing U.S. interest rates, China’s 7-day, 14-day, and 28-day reverse repo rate increases respectively, adjusted from 2.35%, 2.50%, and 2.65%, to 2.45%, 2.60% and 2.70%. On that same day, the standing borrowing facility interest rates were also adjusted. Overnight, the 7-day and 1-month interest rates were 3.30%, 3.45%, and 3.80% respectively (previously 3.10%, 3.35% and 3.70% respectively before adjustment); the 6-month and 1-year MLF rates increased by 10bp, reaching 3.05% and 3.20% respectively.
Additionally, after reverse repo and MLF rates increased by 10bp, the central bank believed that this mainly reflects the various changes in recent domestic and international market supply and demand. It’s due to some signs of recovery from the domestic economy, however, U.S. interest rate hikes were already driven by the global rate of return curve twice.
The central bank operating rate is increasing, making all sorts of short-term market rates continue upward. Among them is the national interbank 7-day period lending rate increasing from 2.46% in July of 2016, to 3.32% (as of June 16, 2017), up 86bp.
Increased Long-Term Yield Will Help the RMB Stabilize
Rising short-term interest rates promotes a continuously increasing long-term yield. In October of 2016, China's 10-year Treasury yield was 2.69%, the lowest since July of 2002. On June 16th, 2017, it’s risen to 3.61%.
In fact, interest rates are also an important factor affecting exchange rates. China’s interest rates will support the RMB exchange rate, however vice-versa, they will suppress the local currency (see below).
