Chinese stocks slumped on Friday, sending Asian markets skidding for their biggest losses in two weeks after Beijing unexpectedly raised short-term interest rates, adding to growing concerns about US President Donald Trump’s aggressive policies.
On the first day of trading after a week-long break for the Lunar New Year, Chinese equities tumbled and the yuan weakened after the People’s Bank of China raised the interest rates on open-market operations by 10 basis points.
Two banking sources also told reporters the central bank had raised the lending rates on its standing lending facility short-term loans, suggesting policymakers were tugging multiple levers to slow down a rampant buildup in debt among Chinese corporates.
“My interpretation of the higher interest rates in China is that the regulator does not want corporates to over-leverage, which could be the case if borrowing cost is low together with ample liquidity,” Natixis Hong Kong-based greater China senior economist Iris Pang said.
The latest increases in market interest rates came after the central bank raised rates on its medium-term loan facility late last month. That was the first time it had raised one of its policy interest rates since July 2011.
Analysts said the fresh increases mark an increase in policy tightening for domestic markets and appears to be aimed at bolstering the yuan after record capital outflows in recent months.
The Institute of International Finance estimated capital outflows from China last year surged to a record US$725 billion.
“The signal is very clear,” Commerzbank AG Singapore-based senior emerging market economist Zhou Hao (周浩) said. “I think it’s targeted tightening compared to the last cycle in 2010-2013.”
Chinese yields snapped a three-year declining trend in late October last year, with five-year benchmark yields rising by 65 basis points since then. Ten-year yields have surged by a greater magnitude, extending their rise on Friday.
The China news could not have come at a worse time for risky assets, just as a rally in US equities and the US dollar — the so-called “Trump trade” — showed further signs of fizzling, hurt by anxiety about the Trump administration’s tough stance on immigration, trade and aggressive posturing in international relations.
MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.3 percent, pulling back from a three-month peak hit in the previous session.
Australian and Japanese markets were down, while others were steady to slightly lower.
“I think the Trump trade has hit the pause button, with both equity and credit markets currently factoring in a very rosy view of the US economy and we need to see more evidence from the policy front before further gains are justified,” Bank of Tokyo Mitsubishi UFJ Ltd Hong Kong-based East Asia head of global markets research Cliff Tan (陳仲華) said.
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