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January 13, 2010

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Central bank bills rate rises

CHINA increased interest rates on its central bank bills for the second time in a week yesterday, fueling expectation of more monetary tightening steps.

The People's Bank of China raised returns on its 20 billion yuan (US$2.9 billion) central bank one-year bills by 0.08 percentage points to 1.8434 percent.

The rate increase was bigger than market expectation, indicating that the central bank is mopping up liquidity faster than the market had predicted.

The bills are auctioned weekly by the central bank as part of its sterilized intervention program to mop up liquidity from the economy.

"The new year begins with frequent interest increases on the central bank bills and attracts lots of market attention," said Lu Zhengwei, an Industrial Bank senior economist.

"The increases showed the central bank's tightening intention as we expect more tighter and stricter policy in the second quarter."

Yesterday's interest rate rise on the one-year bills followed the first such rise on three-month central bank bills last Thursday.

The central bank raised the yield on its three-month bills by 4 basis points, or 0.04 percentage points, to 1.3684 percent.

The yield had been unchanged since August 2009.

The interest rate rise of the one-year central bank bills bolstered expectation of a rise in one-year benchmark interest rates. In China deposits and loan interest rates tend to move in tandem to preserve banks' profit margins.

The central bank yesterday raised the reserve requirement ratio for the first time since December 2008.

The rapidly growing credit in the first week of this month may have accelerated the central bank's tightening steps, Lu said.

It was reported that 600 billion yuan (US$87.85 billion) of new credit had been extended in the first week of January as lenders heavily front-loaded credit issuing in case of tighter policies in the future. January's new credit is likely to surpass 1 trillion yuan.

"It looks necessary for the central bank to send the signal to show its tightening policy on the rapid growing credit this month," Lu said.

China said it will continue the relatively loose monetary policy this year as 2010 will be crucial in consolidating its economic recovery and defeating the global credit crisis.

The next step following the bills rate increase would be increased reserve requirements for commercial banks, which reduces the amount of capital available for lending and lessens the impact of non-performing loans on bank balance sheets.

After that, bank deposit and lending rates could be raised.


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