MNI INTERVIEW: China May Hike Money Rates 10BPS: Ex-PBOC Offcl

--PBOC May Raise Medium-term Lending Facility Rate Before Apr 30

--PBOC May Hike Benchmark Rates This Year

     BEIJING (MNI) - The People's Bank of China is likely to raise the lending

rates in interbank markets by 10 bps should the Federal Reserve hike the Federal

Funds rate on Wednesday, Ming Ming, a former official at the central bank's

Monetary Policy Division told MNI.

     "The central bank may combine cash injection via open-market operations and

hikes in money-market rates to stabilize growth and push forward deleveraging

campaign simultaneously," said Ming, who is now the chief economist of CITIC

Securities, the country's biggest brokerage. 

     Should the central bank decide to hike money rates, the market will likely

see a larger liquidity injection on that same day, Ming added. 

     Last year, the PBOC raised money-market rates twice following moves by the

Fed: by 10 bps in March and 5 bps in December. However, it may take bolder

action to adjust interest rate policies given conditions in domestic and foreign

markets, according to Ming's projection.

     Judging from the first-quarter PBOC monetary policy report published last

month, the central bank is more confident in the strength of the economy and

highlighted the uptick in inflation, which raised the prospect of pending rate

hikes, Ming said.

     China's economy enjoyed a good start to the year, with industrial output

and fixed-asset investment both exceeding market expectations in the first two

months. Its Consumer Price Index (CPI) climbed to 2.9% in February, edging

closer to 3%, which Premier Li Keqiang has set as a point of alarm. 

     --INFLATION TARGET

     While food prices may have largely peaked, core CPI components,

particularly the increasing prices of services, may still edge to 3%, Ming said.

     "Money market rates may, therefore, need to be hiked accordingly," Ming

predicted.

     As the U.S. and other major economies continue to "normalize" monetary

policies, a failure by China to keep pace can widen yield spreads between

Chinese and foreign assets and consequently destabilized the yuan's exchange

rates, Ming said.

     The spread between 10-year China Government Bond and 10-year U.S.

Treasuries has fallen by 48 basis points this year following the rise of U.S.

rates along the yield curve.

     "Coordinating with the Fed policy helps to stabilize Chinese government

bond market and maintain a strong yuan against the greenback," said Ming.

     --BENCHMARK HIKE

     The PBOC may eventually raise its benchmark rates this year to deepen

financial deleveraging and give the market a bigger role to play, according to

Ming. The current low deposit and loan interest rates give the central bank

abundant room for adjustment, he said.

     Higher deposit rates encourage banks to move assets back to their balance

sheets, in line with reducing shadowy transactions and hidden risks, while

increasing lending rates discourages the amassing of more debt, Ming said.

     The PBOC may keep liquidity somewhat looser than last year to accommodate

the transformation of the economy, as projects like the Xiongan New Area still

demand cash, Ming said. The so-called Inclusive Financing, measures boosting

lending to small businesses, also requires liquidity, he said. 

     However, the central bank won't change its neutral bias, so the market

should expect periodic tightening, such as into quarter-ends when cash demand

spikes, Ming said. 

--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com

--MNI Beijing Bureau; +86 10 8532 5998; email: william.bi@mni-news.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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