July 21 (Bloomberg) -- The People’s Bank of China sold one- year bills at the highest rate this year, pushing up money- market rates to avoid bubbles in the stock and property markets.
The yield rose five basis points, or 0.05 percentage point, to 1.65 percent from last week, climbing for a second straight time since the central bank resumed sales of the bills on July 9 to soak up excess cash in the financial system after a gap of almost eight months. The bank sold 15 billion yuan ($2.2 billion) of the debt, compared with 20 billion yuan last week, according to a statement on its Web site.
“The central bank is using the gradual increase in yields to alert the market to prepare for a tighter policy in the future,” said Liu Jianyan, a fixed-income analyst at First Capital Securities Co. in Shenzhen. “But there won’t be a drastic reversal of previous loose monetary policy.”
Three debt auctions by China’s finance ministry failed in the last two weeks, reflecting concern that the country’s 4 trillion yuan stimulus package would cause a return of inflation, forcing the central bank to tighten monetary policy through open-market operations. M2, the broadest measure of money supply, rose by a record 28.5 percent in June.
Liu predicted the yield on the one-year bill will reach 2 percent by the end of the year.
Draining Cash
The central bank conducts weekly auctions of bills due in a year or less to drain excess yuan from the financial system caused by inflows of foreign currency, a process known as sterilization. It also absorbs funds through bill buy-back arrangements with commercial lenders.
The PBOC sold another 15 billion yuan of bills through 28- day repurchase arrangements with banks in today’s open-market operations. The rate climbed to 1.09 percent, the highest for the year, or four basis points more from a week earlier.
Everbright Pramerica Fund Management Co. predicts yields on China’s government bonds will climb about 50 basis points across all maturities within a year. Local-currency debt has declined 1.3 percent this year, an index compiled by HSBC Holdings Plc shows.
“We are less enthusiastic about fixed income because we are forecasting there may be an environment of rising interest rates,” James Yuan, who oversees 36 billion yuan as chief investment officer at the joint venture of Prudential Financial Inc., the second-largest U.S. life insurer, said in an interview yesterday. Money supply growth has been “staggering,” he said.
‘Mini-Bubbles’
The increase in yields will be limited because China’s central bank will refrain from raising its 5.31 percent benchmark one-year lending rate for a year as the government seeks to maintain “mini-bubbles” to help the world’s third- largest economy recover, said Yuan. Gross domestic product climbed 7.9 percent from a year earlier in the second quarter, compared with 6.1 percent in the previous three months.
An interest-rate increase would “hurt the property market and hurt any industries or companies that need financing,” said Yuan. “They won’t do it until the world economy recovers.”
China’s consumer prices fell 1.7 percent in June from a year earlier, according to government data. Inflation may accelerate to as high as 5 percent in 2010, according to China International Capital Corp., a Beijing-based investment bank.
