3-year bank bills restarted to curb inflation

08:45, April 08, 2010      

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For the first time since mid 2008, China's central bank issued 15 billion yuan (US$2.2 billion dollars) of 3-year bank bills on Thursday, in an apparent bid to recoup excessive liquidity on the market.

The move is also seen as Beijing's new effort to prevent rising inflation from jeopardizing its momentous economic growth in 2010. It is also another step that China has taken to unwind the fairly relaxed monetary policy and the proactive stimulus plan, implemented in late 2008 to counter a global financial crisis.

A group of 40 Chinese economists have forecasted a medium inflationary level of 2.4 percent for the first three months this year, which is above the bellwether one-year saving rate of 2.25 percent, set by the central bank.

China's official statistics reported a sharply high 2.7 percent inflation for February, causing jitters among stock market investors that the central bank might start considering raising the interest rates.

Meanwhile, urban housing prices have skyrocketed by more than 30 percent in cities including Beijing, Shanghai and Guangzhou in the first three months, raising the eyebrows of many economists that an equity bubble is building up in the world's major emerging country.

However, it won't be an easy decision for Beijing to raise the interest rates, as the United States, Europe and Japan have stuck to a very low rate policy. The U.S. Federal Reserve again in March ruled that it will keep the federal funds rate at near zero for "an extended period". Beijing is concerned that a unilateral rate hike would attract more "hot money" to China, exacerbating inflation.

The People's Bank of China, the central bank, stopped issuing 3-year bills in June 2008 to counter a sizable economic slowdown then.

"The resumption of the issuance of 3-year bills is the latest signal of liquidity tightening," said Liu Yuhui, an economist with the Chinese Academy of Social Sciences, a top government think tank.

Experts said the resumption of 3-year bill issuance also relates to the country's recent strong economic data.

China's Purchasing Managers' Index (PMI) for manufacturing sectors, which is designed to provide a real-time snapshot of business conditions, rose to 55.1 percent in March, the 13th straight month the index has been above 50 percent.

A PMI reading above 50 percent suggests economic expansion, while one below 50 percent indicates contraction.

"The resumption in 3-year bill issuance shows the central bank has grown more confident about the economic recovery and is paying more attention to inflation control," said He Yifeng, a researcher with the China Institute for Development and Reform at the Central University of Finance and Economics.

"It will help curb credit excesses and ease the pressures for asset price inflation," He said.

China's economists have also recommended the central bank to tighten market liquidity by further raising the bank's deposit reserve ratios. By legally binding lenders packing more of their savings at the central bank, which is set at 16.5 percent now, at least 550 billion yuan of credit could be withdrawn from the market. Experts said.

By People's Daily Online


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