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China aims to draw excess cash by raising yield on bills
By Jason Subler and Aileen Wang |
November 10, 2010, Wednesday
|
Print Edition
Print Edition
CHINA signaled its intention yesterday to drain excess cash from its financial system by unexpectedly raising the yield on bills at a central bank auction.
The move flagged China's increasing concern about a surge in liquidity after the United States Federal Reserve launched another round of quantitative easing, prompting some analysts to say monetary tightening may be closer than thought.
"China still has a strong momentum of rapid credit expansion," Du Jinfu, vice governor of the People's Bank of China, said in summing up the challenges facing the central bank.
"There is obviously an increase in cyclical macro-economic risks such as excessive liquidity, inflation, bad debts and asset bubbles," Du told a financial conference.
Shortly before Du's comments, the central bank surprised markets by ramping up the yield on one-year bills to draw cash out of the financial system.
It sold the bills at a yield of 2.3437 percent, more than 5 basis points higher than levels at auctions since just after the central bank raised its benchmark interest rates in mid-October.
Markets were even more surprised by the yuan's moves on the day. The Chinese currency registered its largest intraday price movement since its July 2005 revaluation.
Analysts and traders took the yield increase as a sign that the central bank could raise rates again, or increase banks' required reserves.
"The auction yield itself already suggests a possible rate hike is coming soon," said a senior trader at a Chinese bank in Shanghai. "Previously, rises in the auction yield of one-year bills often pointed to a quick follow-through rate hike."
Analysts said the central bank wants to prevent a flood of cash from generating runaway inflation and price bubbles in asset markets, particularly stocks and property.
Annual consumer inflation rose to a 23-month high of 3.6 percent in September and analysts polled by Reuters expect data tomorrow to show it climbed to 4 percent in October.
Complicating matters is a surge in cash seeking a home in China, as shown by a sharp fall in short-term money market rates last week.
The move flagged China's increasing concern about a surge in liquidity after the United States Federal Reserve launched another round of quantitative easing, prompting some analysts to say monetary tightening may be closer than thought.
"China still has a strong momentum of rapid credit expansion," Du Jinfu, vice governor of the People's Bank of China, said in summing up the challenges facing the central bank.
"There is obviously an increase in cyclical macro-economic risks such as excessive liquidity, inflation, bad debts and asset bubbles," Du told a financial conference.
Shortly before Du's comments, the central bank surprised markets by ramping up the yield on one-year bills to draw cash out of the financial system.
It sold the bills at a yield of 2.3437 percent, more than 5 basis points higher than levels at auctions since just after the central bank raised its benchmark interest rates in mid-October.
Markets were even more surprised by the yuan's moves on the day. The Chinese currency registered its largest intraday price movement since its July 2005 revaluation.
Analysts and traders took the yield increase as a sign that the central bank could raise rates again, or increase banks' required reserves.
"The auction yield itself already suggests a possible rate hike is coming soon," said a senior trader at a Chinese bank in Shanghai. "Previously, rises in the auction yield of one-year bills often pointed to a quick follow-through rate hike."
Analysts said the central bank wants to prevent a flood of cash from generating runaway inflation and price bubbles in asset markets, particularly stocks and property.
Annual consumer inflation rose to a 23-month high of 3.6 percent in September and analysts polled by Reuters expect data tomorrow to show it climbed to 4 percent in October.
Complicating matters is a surge in cash seeking a home in China, as shown by a sharp fall in short-term money market rates last week.
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