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China's central bank will issue 100 billion yuan (US$15 billion) in special bills to Chinese shareholding banks, another signal that it was stepping up efforts to drain excessive liquidity and stem a surge in bank lending, traders said.
The rare decision to sell special bills suggested that the central bank was absorbing money market funds to keep them from being used for corporate lending, highlighting the concerns that massive lending surge this year could lead to long-term inflation and bad loans.
"The special bill issue further confirms that the central bank wants to clamp down on excessive corporate lending," said Lin Chaohui, analyst at Guotai Junan Securities.
The one-year bonds would bear a punitive yield of 1.5 percent, and banks ordered to buy them must pay the money in September -- an move aimed at clamping on any bank lending at the end of the quarter, traders said.
But a trader at a mid-sized Chinese bank in Nanjing said the decision to set the payment date in September implied that it wanted to tighten policy only in a very gradual way.
The People's Bank of China has lifted rates in its short-term repurchase operations for three straight weeks and resumed issuance of benchmark one-year bill last week for the first time since November.
The moves to tighten interbank liquidity, along with fund flows tied to the resumption of new initial public offerings (IPOs), has caught some market players off guard and sparked a sharp rise in short-term interest rates.
One-year onshore IRS have shot up about 50 basis points so far this month to eight-month highs and were last at 2.01 percent.
The last confirmed special bill sales was in September 2007 when the central bank sold 151 billion yuan of three-year bills to selected commercial bank when the central bank was tightening monetary policy.
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Traders said the PBOC was rumored to have conducted a special bill sale earlier in the year, but it did not confirm the move.
Chinese bank leading reached 7.37 trillion yuan (US$1.1 trillion) in the first half of the year, far exceeding what the government's 5 trillion yuan minimum target for all of 2009.
Data earlier on Wednesday showed the money is flowing into the economy, with annual growth in China's broad M2 measure of money supply shooting up 28.5 percent in June.
On Monday PBOC Assistant Governor Li Dongrong said China would strengthen oversight of bank lending to make sure it is properly channeled.
Data is a real-time snapshot *Data is delayed at least 15 minutes