China Guides Bill Yields Higher, Seeks to Curb Loans

China’s central bank sold three-month bills at a higher interest rate for the first time in 19 weeks after saying its focus for 2010 is controlling the record expansion in lending and curbing price increases.
The People’s Bank of China offered 60 billion yuan ($8.8 billion) of bills at a yield of 1.3684 percent, four basis points higher than at last week’s sale, according to a statement. Policy makers will seek “moderate” loan growth to support the economy while managing inflation expectations, the bank said yesterday in a report on its annual work meeting.
“It’s definitely a signal that the central bank is tightening liquidity,” said Jiang Chao, a fixed-income analyst in Shanghai at Guotai Junan Securities Co., the nation’s largest brokerage by revenue. “The rising yield is used to prevent excessive growth in bank lending.”
Stocks fell across Asia and oil declined on concern growth will slow in China, the engine of the world economy’s recovery from its worst recession since World War II. Premier Wen Jiabao said on Dec. 27 that last year’s doubling in new loans had caused property prices to rise “too quickly,” while surging commodity costs were increasing inflationary pressure.
The MSCI Asia Pacific Index fell 0.5 percent and crude oil for February delivery slid 0.6 percent after 10 days of gains. Copper for delivery in three months dropped as much as 1 percent. The Shanghai Composite Index fell 2 percent, led by Bank of China Ltd. and Industrial & Commercial Bank of China Ltd.
Tightening in Asia
“We expect some tightening of monetary policy in Asia in the first half,” said Norman Villamin, Singapore-based head of investment analysis for Asia Pacific at Citigroup Private Bank. “Markets will struggle to go higher.”
Australia’s central bank raised borrowing costs by a quarter percentage point on Dec. 1 to 3.75 percent after similar moves in November and October. The Bank of Korea, which meets tomorrow, will probably raise its benchmark rate one percentage point to 3 percent by end-2010, according to a Bloomberg survey of economists. By contrast, rates are close to zero in the U.S. and the Federal Reserve last month discussed increasing asset purchases should the economy weaken.
China’s government has told lenders to pace their lending, while tightening tax and mortgage rules for second-home purchases. Liu Mingkang, the top banking regulator, wrote in an opinion piece in Bloomberg News this week that “structural bubbles threaten to emerge” in the world’s fastest-growing economy.
“There’s no doubt that lending has been excessive and that explains why policy makers are starting to be more cautious about lending this year,” said Qu Hongbin, chief China economist for HSBC Holdings Plc in Hong Kong.
Bill Sales
Guotai Junan’s Jiang said the yield on one-year bills will climb in open-market operations next week, following the resumption of gains for rates on three-month notes. The yield will increase about four basis points from the 1.7605 percent level it’s been kept at since Aug. 11, he predicted.
The central bank resumed sales of one-year bills on July 9 after an eight-month suspension to help drain cash from banks. Higher bill yields may encourage lenders to part with more cash, reducing funds in the banking system available for loans.
China’s one-year interest-rate swap, the cost of receiving a floating rate for 12 months, rose 9.5 basis points to 2.23 percent. The yield on the 2.18 percent treasury note due September 2012 climbed three basis points to 2.45 percent, according to quotes provided by the China Interbank Bond Market. A basis point is 0.01 percentage point.
Lending Boom
Qu estimates new loans will be limited to 7 trillion yuan in 2010. Banks extended an unprecedented 9.21 trillion yuan of loans in the first 11 months of 2009, compared with 4.15 trillion yuan a year earlier. The China Banking Regulatory Commission recommends lending this year should be between 7 trillion yuan and 8 trillion yuan, a person familiar with the matter said last month.
The People’s Bank said it would curb volatility in lending, monitor the property market and “stabilize the stock market’s operations,” without elaborating on the latter comment. It reaffirmed a “moderately loose” monetary policy.
The statement contrasted with the start of 2009, when the central bank targeted “appropriate” increases in lending and money supply and said monetary policy would play “a more active role in promoting economic growth.”
Consumer prices climbed 0.6 percent in November from a year earlier, snapping a nine-month run of declines. The central bank is on alert for inflation after economic growth accelerated to 8.9 percent in the third quarter of 2009, the fastest in a year.
Property Prices
Housing Minister Jiang Weixin said yesterday that the nation will limit credit for some home purchases to reduce property-market speculation. Prices across 70 cities rose at the fastest pace in 16 months in November, gaining 5.7 percent from a year earlier, led by Shenzhen, Wenzhou and Jinhua.
The central bank will “closely watch changes in the property market, strictly implement relevant property lending policies and promote the healthy development of property finance,” its statement said.
The central bank didn’t state a 2010 target for growth in M2, the broad measure of money supply, after overshooting a 17 percent goal last year. The actual rate was more than 25 percent for most of 2009, rising to a record 29.7 percent in November.
“Growth will probably slow this year as tight credit will dampen the demand side,” said Zhang Ling, who helps oversee about $7.21 billion at ICBC Credit Suisse Asset Management Co. in Beijing. “That will dash investors’ hopes of another year of fast growth.”