Asian markets slump as China increases short-term interest rates

Asian stock market indices were trading lower on Friday (3 February) with the Shanghai Composite down 0.44% at 3,145.44 as of 5:34am GMT as China announced an increase in short-term interest rates.

The People's Bank of China (PBOC) raised the interest rates on open market operations by 10 basis points across the standing lending facility (SLF) short-term loans suggesting that policymakers are trying to slow down the debt build-up among corporates in the country.

Iris Pang, senior economist at Natixis, said: "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."

While the move was unexpected, it is not the first such increase by the world's second largest economy in 2017. Last month, the Chinese central bank increased the rates on its medium-term loan facility (MLF), the first such raise since July 2011.

Analysts said the moves reflect an increase in policy tightening by China for its domestic markets, aimed at bolstering its currency after the country saw record capital outflows in recent months.

"The signal is very clear...I think it's targeted tightening compared to the last cycle in 2010-2013," Zhou Hao, senior emerging market economist, Asia, for Commerzbank, was quoted as saying by Reuters.

China also reported a slowdown in its manufacturing activity. The Caixin manufacturing purchasing managers' index (PMI) was reported at 51.0 for January which was not only lower than December's 51.9, but also lower than a Reuters poll forecast of 51.2. The PMI data is a closely watched indicator of economic health of the country, according to CNBC.

Indices in the region were trading as follows at 6.08am GMT:

On 2 February, the FTSE 100 Index closed 0.47% higher at 7,140.75, while the S&P 500 index closed 0.06% higher at 2,280.85.

Among commodities, oil prices gained amid reports that the US could impose fresh sanctions on several Iranian entities, suggesting a possible decline in total output. As of 12.57am EST, WTI crude oil was up 0.64% at $53.88 (£43.03) a barrel, while Brent crude was trading 0.50% higher at $56.84 a barrel.