central-bank

By Bloomberg News April 7 (Bloomberg) — China’s central bank will sell three-year bills tomorrow for the first time since June 2008, seeking to drain cash from the world’s fastest-growing economy, traders at three of the nation’s largest banks said. The People’s Bank of China asked the lenders to give indications of their demand for the securities, said the traders, who asked not to be identified before an official announcement. The companies are primary dealers required to bid at bill auctions. A central bank press officer declined to comment. Selling higher-yielding bills may be a precursor to the first increase in benchmark lending rates in more than two years and allowing yuan gains, said Jiang Chao , an analyst at Guotai Junan Securities Co., the nation’s largest brokerage by revenue. Policy makers from China to India have begun withdrawing economic stimulus this year, seeking to prevent asset-price bubbles as Asia leads the recovery from a global recession. “This is meant to pave the way for the central bank to raise interest rates or resume yuan appreciation,” said Jiang. “The PBOC can drain liquidity by issuing bills if the interest- rate hike or appreciation attracts more hot money.” The seven-day repurchase rate , which measures interbank funding availability, rose eight basis points to 1.7 percent. The central bank last sold one-year bills at a yield of 1.9264 percent yesterday, unchanged for the 10th sale in a row. It guided the rate higher twice in January. Loan Growth Yuan forwards strengthened for a ninth day, the longest winning streak in more than a year, on speculation China will end a 21-month-old peg to the U.S. dollar to help curb inflationary pressures. U.S. Treasury Secretary Timothy F. Geithner yesterday said China needs to make its own decision on when to revalue the yuan. Twelve-month non-deliverable forwards climbed 0.1 percent to 6.6295 per dollar, reflecting bets the currency will strengthen 3 percent from the spot rate of 6.8255. The People’s Bank is targeting a drop of 22 percent in new lending this year from 2009’s record 9.59 trillion yuan ($1.4 billion) and has told banks twice this year to set aside more cash as reserves. India increased interest rates last month for the first time in almost two years. Australia’s central bank has raised borrowing costs in five out of the past six meetings. China’s central bank last cut its one-year lending rate by 0.27 percentage point to 5.31 percent in December 2008 to revive the economy amid the financial crisis. The monetary authority raised the rate in March 2007, two months after selling three- year bills following an 18-month interval. It’s most-recent increase was in December 2007. Inflation Target Central bank adviser Li Daokui said the nation may raise rates this quarter should the inflation rate breach 3 percent, the China Securities Journal reported today. Consumer prices rose 2.7 percent in February from a year earlier. The bills will drain cash from the economy by providing an alternative to lending, according to Xu Xiaoqing , a bond analyst at China International Capital Corp., the nation’s first Sino- foreign investment bank in Beijing. “The central bank needs to use higher-yielding bills to attract banks so that they won’t make too many loans,” said Xu, who sees a rate increase this quarter. “Three-year bills can lock up banks’ cash for longer periods, which will push up money-market rates and bond yields.” China’s finance ministry sold 28 billion yuan in five-year bonds at an average yield of 2.70 percent, two basis points higher than the 2.68 percent median estimate in a Bloomberg News survey. A basis point is 0.01 percentage point. Asset Bubbles China’s central bank said in its 2009 report on international financial markets on April 2 that asset bubbles are emerging in parts of the world and in certain industries that may burst unless supported by real economic recovery.     “They’re trying to tighten policy to some extent,” said Ben Simpfendorfer , Hong Kong-based chief China economist at Royal Bank of Scotland Group Plc. “There’s talk about a rate hike coming in the next few months, so this would be an initial step.” — Belinda Cao , Bob Chen , Judy Chen . Editors: Sandy Hendry , James Regan To contact the reporter on this story: Belinda Cao in Beijing at lcao4@bloomberg.net