China is back to work, and its markets are tanking

People shelter against rain in Hangzhou. Photo: ChinaFotoPress/Getty Images

Stocks in China are sinking, bonds are selling off, and commodity markets are getting hammered in Friday’s Asian trading session.

With the Chinese financial industry returning to work today after the Lunar New Year holiday, the nation’s central bank, the People’s Bank of China (PBOC), adjusted some key lending rates in what appears to be a tightening of monetary policy.

The PBOC announced it was increasing the interest rates on its open market operations by 10 basis points, effective immediately.

“The seven-day open market operations rate was raised to 2.35% from 2.25%, the rate for 14-day tenor to 2.50% from 2.40%, and the rate for 28-day tenor to 2.65% compared with the previous 2.55%,” said Reuters, citing a statement posted on the bank’s website on Friday.

Reverse repos are used by central banks to drain liquidity from a nation’s financial system.

“A rate hike on the first working day after the New Year holiday signals a new attitude,” Raymond Yeung, chief greater China economist at ANZ Bank in Hong Kong, told Bloomberg. “The PBOC never makes it clear, but the 7-day reverse repo rate is the unofficial policy rate, a significant benchmark for interbank rates.”

The PBOC bank drained a net 70 billion yuan ($US10.19 billion) through open market operations on Friday, mopping up financial market liquidity that was supplied in the lead up to the New Year holiday.

Coinciding with the increase made to repo rates, there have been unconfirmed reports that the PBOC has also raised lending rates on its standing lending facility (SLF) loans today.

Reuters, citing two unnamed banking sources, said the overnight rate was raised to 3.1% from 2.75%. The rate for seven-day and one-month tenors was also increased by ten basis points, according to the sources, rising to 3.35% and 3.7% respectively.

The SLF is used by the PBoC to smooth out liquidity fluctuations and short-term borrowing rates.

According to Caixin, the SLF is more flexible than cutting interest rates and the reserve-requirement ratio, allowing the PBoC to influence short-term interest rates more directly than through regulating the money supply.

Chinese financial markets have not welcomed the news with bond yields spiking higher while at the same time stocks have slumped.

The yield on the 10-year government bond yield ripped higher to 3.34%, up more than 6 basis points to its highest level since August last year.

The Shanghai Composite, China’s benchmark stock index, was down 0.7% a short time ago.

Commodity futures — a hot bet for speculative activity in recent months — have also been hammered, suffering declines of between 2 to 5.5%.

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