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Sept. 24 (Bloomberg) -- China’s central bank will sell bills in the coming quarter for the first time since June to contain inflation as cash pours in from abroad, HSBC Holdings Plc and Guotai Junan Securities Co. forecast.
The People’s Bank of China halted issuance three months ago to avoid exacerbating a cash crunch as it clamped down on speculative financing. Interest rates surged to records in June before retreating as reverse-repurchase agreements were used to inject funds and improving economic data attracted capital.
Yuan positions at local banks accumulated from sales of foreign exchange to the PBOC, a gauge of inflows, climbed 27.3 billion yuan ($4.5 billion) in August following declines of 24.5 billion in July and 41.2 billion yuan in June. Three-month bills were last auctioned on June 20 and repurchase agreements haven’t been sold since June 6. Inflation concerns made China’s bonds the worst performers this month in Asia excluding Japan, HSBC indexes show.
“It’s very possible that the PBOC will return to a tightening stance in open-market operations, starting with repo and bill sales in the fourth quarter,” Pin Ru Tan, an interest- rate strategist at HSBC Securities Asia Ltd. in Hong Kong, said in a Sept. 18 interview. “However, it’s hard to determine the timing as it will be dependent on how the liquidity situation pans out following the holidays and quarter-end accounting.”
China’s financial markets were shut Sept. 19-20 and will again be closed Oct. 1-7 for holidays, increasing banks’ demand for cash reserves. The central bank asked lenders to submit orders yesterday for seven- and 14-day reverse-repurchase agreements, 28-day repurchase contracts and 91-day bills, according to a trader at a primary dealer required to bid at the auctions.
Manufacturing is expanding this month at the fastest pace in six months, according to a preliminary Purchasing Manager’s Index released yesterday by HSBC and Markit Economics. Industrial output grew in August at the fastest pace in 17 months and the broadest measure of new credit almost doubled from the previous month to 1.57 trillion yuan ($257 billion), official data show.
China’s 10-year government bond yield has climbed 48 basis points this quarter, the most since 2010, to 3.99 percent, according to a ChinaBond index. The rate on comparable U.S. Treasuries increased 25 basis points, or 0.25 percentage point, to 2.75 percent. China’s debt lost 0.1 percent this month, the only decline in Asia, according to the HSBC Local Bond Index.
The seven-day repo rate, which measures interbank funding availability, averaged 3.66 percent so far this month, down from an all-time high of 10.77 percent on June 20, based on daily fixings by the National Interbank Funding Center. The rate rose 22 basis points yesterday to 4.35 percent.
“There’s a risk of tightening and a very likely window is in the second week of October,” Xu Hanfei, Shanghai-based head of fixed-income research at Guotai Junan Securities Co., which has obtained the most licenses in fixed-income businesses among brokerages. “If policies do not adjust with an improvement in the economy and an increase in liquidity and inflation, it’s a defacto loosening,” he said at a Sept. 17 conference.
Premier Li Keqiang said Sept. 11 that monetary policy will remain stable and the central bank won’t loosen or tighten even if there is short-term volatility in the money market.
“Recent remarks by Premier Li showed the authorities want to maintain a neutral stance in monetary policy, so if the foreign-exchange purchases position is high, then the central bank needs to issue bills to mop up liquidity,” said Song Qiuhong, an analyst at Shunde Rural Commercial Bank in Foshan.
The central bank rolled over maturing three-year notes in the past two months, most recently by re-issuing 85.1 billion yuan of debt on Sept. 9. The central bank reiterated it will maintain a prudent monetary policy and fine tune it at an appropriate time in its second-quarter monetary policy report released on Aug. 2.
China’s consumer prices climbed 2.6 percent in August from a year earlier, or 0.5 percent from the previous month, which was the biggest gain since February, official data show. The central government aims to keep the rate below 3.5 percent this year.
“Month-on-month inflation growth is in an upward trajectory before the end of this year,” said Guotai Junan’s Xu, who predicts it will exceed 3 percent this month or next and accelerate through 3.5 percent in the first quarter.
The yuan has risen 1.8 percent this year, the most among 11 Asian currencies tracked by Bloomberg. It was little changed yesterday at 6.1210 per dollar in Shanghai. Credit-default swaps insuring China’s debt against non-payment fell 39 basis points this quarter to 80 on Sept. 20 in New York, CMA data show.
“Liquidity measures don’t necessarily follow the economy, but the liquidity situation,” said Frances Cheung, a Hong Kong- based senior strategist at Credit Agricole CIB. “The PBOC can act any moment. The yuan will stably appreciate, so naturally there will be a degree of liquidity.”
--Helen Sun. Editors: James Regan, Sandy Hendry