INVESTORS are demanding higher yields than traders are predicting at auctions of Chinese bonds on speculation the government's efforts to fight inflation will stoke a cash crunch.
The Finance Ministry sold one-year debt to yield 3.90 percent on Wednesday, four basis points more than the median estimate of finance companies surveyed by Bloomberg News. In last week's sale, policy makers sold three-year notes at 3.91 percent, the highest since 2008 and six basis points more than traders predicted. United States Treasuries maturing in a year yield 0.08 percent, and three-year bonds pay 0.34 percent.
Chinese inflation, which slowed to 6.2 percent in August, from a three-year high of 6.5 percent, must be stemmed even with the threat of a global slowdown, Premier Wen Jiabao said on Wednesday. Traders of interest-rate swaps are betting borrowing costs will be raised once more in the next year, after five increases in the past 12 months. China has also expanded the amount banks have to keep in reserve to include margin deposits.
"There is a very low probability that we will see a monetary policy makeover this year as inflation remains high," said Chen Jianheng, a bond analyst at China International Capital Corp in Beijing. "The market is expecting the cash shortage to return."
Banks are demanding near-record interest rates to lend to one another for six months or more, Shanghai interbank rates show. The Shibor rate on six-month yuan loans was 5.30 percent, after reaching 5.31 percent on July 14, the highest level since the daily fixing was introduced in October 2006. The equivalent cost to borrow dollars in London was 0.521 percent on Wednesday, the highest level since August 2010.
China should maintain prudent monetary policy for a long time and address the nation's negative real interest-rate problem, Li Daokui, a People's Bank of China adviser, said at the World Economic Forum in the northeastern city of Dalian on Wednesday.
Saving discouraged
The PBOC's benchmark one-year deposit rate stands at 3.5 percent following five hikes in the past 12 months, 270 basis points, or 2.7 percentage points, below the inflation rate, discouraging saving. Consumer-price gains will continue to abate, Li said.
The Asian Development Bank raised its projection for 2011 Chinese inflation to 5.3 percent from 4.6 percent, and trimmed its forecast for economic growth to 9.3 percent from 9.6 percent, according to a report released on Wednesday.
"We can't exclude the possibility of another interest-rate hike by the end of this year," said Huang Yanhong, a bond analyst in Nanjing at Bank of Nanjing Co, a lender partly owned by BNP Paribas SA. "After all, inflation is still quite high."
China's two-year interest-rate swaps that exchange the one-year official savings rate for a fixed payment have risen eight basis points to 3.6250 percent since the central bank last raised borrowing costs on July 6.
Buyers of the swaps receive the deposit rate for one year, after which the floating payment is reset for the second year at the prevailing deposit rate. The current level shows traders are betting interest rates will be raised one more time by a quarter of a percentage point in the coming year.
While Chinese banks will have to set aside more cash in the next six months to meet the expanded reserve-requirement ratio, policymakers may also use debt sales to absorb capital, said China International's Chen. The central bank sold more than 20 billion yuan of additional bills to lenders including the Industrial and Commercial Bank of China Ltd after they were judged to have lent excessively, the Beijing News reported on Tuesday, citing an unidentified person.
Strengthening yuan
The Finance Ministry sold 32.51 billion yuan (US$5.1 billion) of one-year notes on Wednesday and 30 billion yuan of the three-year debt last week.
Source:shanghaidaily