MONEY MARKETS-Rising China yields hint at policy tightening

By Vidya Ranganathan SINGAPORE, July 3 (Reuters) - A jump in yields at China's auction of bills this week has driven other short term rates higher and stirred market speculation that the central bank may be stealthily tightening monetary policy. At the regular Thursday auction of 3-month bills, the People's Bank of China sold 50 billion yuan worth of the bills at 1.0279 percent. That was bound to cause a ripple, the yield being a jump from last week's 0.965 percent, which had held at the previous 22 auctions. "Thursday's bill auction underlines the view that the PBOC is no longer focusing on keeping money market rates at extremely low levels," analysts at Standard Chartered Bank said in a note. Other market rates reacted, with the 7-day repo rate now at 1.244 percent rather than last week's ranges below 1 percent. In the forward rate agreements market, which shows future expectations of interbank rates, the three-month rate is quoted at 1.26 percent in a month's time, a rise from 1.2 at the start of this week. Analysts reckoned it was not possible that the rise in yields was entirely due to a resumption in initial public offerings by Chinese firms. IPOs were suspended last year. This week, the first IPO since that ban was removed, that of drugmaker Guilin Sanjin Pharmaceutical, was subscribed 584 times and locked up 455 billion yuan of investor funds. "While a change in the 7-day repo rate could arguably be related to a tightening of liquidity in the interbank market due to IPO subscriptions, the rise in the primary market yield on the central bank's 3-month sterilisation paper raises questions about whether this is the start of a shift in the PBOC's monetary policy stance," analysts at Barclays said in a note. Barclays said this was not the start of a tightening of broader monetary policy, even though the Chinese central bank was worried about credit expansion and the eventual rise in rates, such as through higher reserve requirements, could come earlier than expected. The central bank last cut its benchmark rates in December. The bank has been draining yuan funds through its open market operations, which include short term repurchase agreements on Tuesdays and bill sales on Thursdays. Last week, it injected around 115 billion yuan into the market. This week, it has drained 80 billion yuan via repos and an additional 50 billion yuan through the bill auction, yet the banking system received net inflows because of the maturity of 161.5 billion of bills and repos. Other analysts concurred that even though the Chinese central bank had not explicitly said anything about tightening policy, the move in yields this week required close watching. It was premature to conclude the central bank had started tightening policy based on what had happened so far," said ING Bank's chief Asian economist Tim Condon. "But my own sense is that they have nudged rates higher and there is a modest tightening in monetary conditions which reflects comfort at the PBOC level with the implementation of the monetary and fiscal stimulus and the economy's response to it." (Editing by Jan Dahinten) (([e-mail]; [phone]; Reuters Messaging: [e-mail])) ($1=6.832 Yuan) Keywords: MARKETS MONEY (If you have a query or comment on this story, send an email to [e-mail]) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved.

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