The Chinese central bank has quietly raised domestic money market rates. Such move is to target the current increasing capital outflows. In the central bank's statement, the decision was made based on "recent changes in external and domestic factors influencing market supply and demand", it was "not at all a rate rise".
The current capital outflows are caused by several reasons. Firstly, there is an increase in overseas investment on a global scale. When Chinese are investing in other countries, capitals will definitely be moved to foreign countries. Secondly, the Chinese government may be worried about if the capital outflows result in an increase in worry about the domestic economic and social condition. People know money is likely to move to where has higher returns and lower risk. When capital is flowing out of China, it could send signals and cause market anxious. Thirdly, capital outflows could also affect the Chinese government tax incomes, as currently many countries have troubles of taxing multinational companies. Therefore, it is not surprising to see China is trying to slow down its capital outflows.
The central bank's new policy only increases the cost of transferring capitals to overseas, does not fundamentally change the factors that lead people to transfer their capitals to overseas, other than the cost factor. However, it also raises some concerns about the cost of borrowing from local banks. Some local banks do not have very strong balance sheets at the moment as they more often need interbank money market to raise sufficient fund. The increase in the short term rates will significantly increase their costs, and may even force them into financial difficulties.
Therefore, such increase in rates is a very risky move to slow down the current capital outflows.
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