China's central bank tightened monetary policy by raisingthe interest rates it charges in open-market operations and onfunds lent via its Standing Lending Facility as it shifts toreining in asset prices and inflation.

The People's Bank of China increased the costs of seven-, 14-and 28-day reverse repurchase agreements by 10 basis points each to2.35%, 2.5% and 2.65%, respectively, according to a statement onits website. This is the first increase since 2013 for the twoshorter tenors, and the first such move since 2015 for the 28-daycontracts.

The SLF rate was increased to 3.1% from 2.75%, according topeople familiar with the matter who declined to be identifiedbecause they're not authorized to speak publicly.

The moves come just as cash demand is expected to ease after theweek-long Lunar New Year holidays and follows an increase in rateson medium-term loans last week. The PBOC is midway through a policyoverhaul, with officials in the past signaling a corridor isevolving where repo rates guide the short end and SLF rates act asthe ceiling.

“A rate hike on the first working day after the New Year holidaysignals a new attitude,” said Raymond Yeung, chief greater Chinaeconomist at Australia & New Zealand Banking Group Ltd. in HongKong. “The PBOC never makes it clear, but the seven-day reverserepo rate is the unofficial policy rate, a significant benchmarkfor interbank rates.”

One-year interest-rate swaps climbed as much as 12 basis pointsto 3.43%, the highest since Dec. 28, while the seven-day repurchaserate pared declines to 13 basis points to trade at 2.50%, accordingto a weighted average. Ten-year government bonds were littlechanged, while Shanghai shares extended losses to 0.6 percent.

'Tightening Message'

The PBOC's move is “surprising and the tightening message isstrong,” said Frances Cheung, Hong Kong-based head of ratesstrategy for Asia ex-Japan at Societe General. The fact that thewhole yield curve rose shows the market is concerned about furtherdeleveraging, she said.

The move will send Chinese bonds into a technical bear market,said Ming Ming, Beijing-based head of fixed income research atCitic Securities Co. Tighter policy aims to further deleveraging,prevent an overheating in credit growth and widen the yieldadvantage Chinese bonds have over U.S. debt, thereby supporting theyuan, Ming said.

In a Bloomberg News survey conducted in late December, one-thirdof the 24 respondents predicted the PBOC would increase reverserepo rates, while the rest expected no change. The central bank hasalso been tightening cash supply since August to curb leverage inthe financial system, rein in price gains and support the exchangerate.

Policy Shift

With factory prices rebounding after years of deflation, policymakers have made avoiding financial system risk a key theme inrecent months. Friday's moves underscore the leadership'sdetermination to push up funding costs of short-term tenors to reinin leverage and switch to the combination of less monetary stimulusand more fiscal support, after earlier easing fueled bubbles inbonds and the property market.

Tightening via lending facilities and money-market rates showsthe central bank's desire to make further progress on liberalizinginterest rates, said Iris Pang, senior economist for Greater Chinaat Natixis Asia Ltd. in Hong Kong.

The PBOC's easing cycle since late 2014 included a series ofcuts that pushed the main interest rate to a record low. That'sbeen accompanied by a buildup in borrowing that's increased debt to264 percent of GDP, according to Bloomberg Intelligence.

While balancing between economic growth and cutting leverage hasbeen an eternal game for policy makers, the latest moves show morewillingness to sacrifice growth to control risks, said Tommy Xie,an economist at OCBC Bank in Singapore. “Reining in risks is thepriority.”

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