Central bank pushes moderate monetary policy, loosens liquidity

09:50, June 17, 2010      

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The central bank reduced bond issuance over the holiday weekend, sending a signal that the government is planning on maintaining a relatively loose monetary policy as worries grow about a potential double-dip, market analysts said Wednesday.

The People's Bank of China (PBC) today will issue 5 billion yuan ($732.06 million) worth of one-year bonds, and 18 billion yuan ($2.64 billion) of three-year bonds, said a statement on its website Sunday.

The coupon rates, the equivalent of their interest, will be set at auction attended by State-owned commercial banks, regional banks and securities brokers.

This issuance marks a significant drop off from previous releases. The one-year bills are 20 billion yuan ($2.93 billion) less than June 8 and the three-year bill fell 92 billion yuan ($13.47 billion) from the last issuance on May 6.

The European debt crisis has made China's economic stability far less certain, said Zhang Youxian, an analyst at the Bank of China's Institute of International Finance. Add the tightening policies aimed at the housing market and overall economic restructuring, the PBC needs to ensure moderate liquidity to give the economy a boost, Zhang added.

The PBC is reducing the amount of bonds because of the banks' lack of liquidity, he said. "There's less demand now."

New lending in May was 639.4 billion yuan ($93.62 billion), a drop of 100 billion yuan ($14.64 billion) month-on-month. Following the tightening rules on property market, banks are no longer allowed to lend to buyers of more than two homes, thereby affecting the future cash flow generated by mortgages.

Meanwhile regulations to reduce default risks have squeezed liquidity. The capital adequacy ratio is now 11.5 percent and commercial banks are required to hold 17 percent of the public deposits in central bank's reserves. Both rates have risen in the past half year.

The world's largest IPO may also be at stake, according to Tan Ruyong, professor of finance at Shanghai University of Finance and Economics.

If liquidity is too tight, the Agricultural Bank of China's July offering may be affected, Tan said, adding that he didn't expect the PBC to further rein in liquidity until after AgBank goes public.

Source: Global Times


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