China lifts short-term rates to steady yuan, battle debt

China's central bank raised short-term interest rates on Thursday in what economists said was a bid to stave off capital outflows and keep the yuan currency stable after the Federal Reserve raised US rates overnight.
The increase in rates was China's third in as many months, and came a day after the end of the annual session of parliament where leaders warned that tackling risks from a rapid build-up in debt would be a top policy priority this year.
Hours earlier, the Fed raised its benchmark policy rate, as had been widely expected, and signalled more hikes were on the way as the US economy picks up steam.
"The timing says it all. China is no longer insulated from the Fed and, more generally, from international financial conditions," said Alicia Garcia Herrero, chief Asia Pacific economist at Natixis.
The People's Bank of China (PBOC) has left its benchmark lending rate unchanged since an October 2015 cut, and said specifically that Thursday's action should not be seen as full-blown policy tightening, like that of the Fed.
But analysts and investors believe the PBOC is increasingly using money market rates and other policy tools as it struggles to contain financial risks from years of debt-fuelled stimulus and raise the costs for speculators betting against the yuan.
China's banks tend to rely heavily on short-term, interbank lending, which connect strong banks with weaker counterparts and shadowy lenders. The PBOC has been allowing repo rates to rise since late 2016 by adjusting the amount of funds it injects.
"The higher US rates and tightening of US monetary policy could trigger further capital outflows and have some negative impact on China's financial system," Nomura economist Yang Zhao said.
"I think they want to stabilise the currency at this time."
The PBOC also strengthened the yuan's daily mid-point reference rate by the most in about two months on Thursday. The yuan ended the day up 0.2 percent.
But benchmark 10-year treasury futures closed at their highest in over two months, as a big central bank cash injection calmed market jitters after the rate rises.