Predicting PBOC’s Next Move, as Easy as One-Year Bills?

By WSJ Staff

SHANGHAI–China’s central bank raised the yield on the one-year bills it sold in its regular open market operation Tuesday by more than five basis points, amid expectations that inflation continued to grow in October.

The move, which comes two days before the National Bureau of Statistics is due to issue consumer price data for October, raised concerns among investors that Beijing may be preparing to introduce more tightening measures, such as a further interest-rate increase, to contain inflationary pressure and excess liquidity triggered by the U.S. Federal Reserve’s quantitative easing policy.

The People’s Bank of China said in a statement Tuesday it sold 32 billion yuan ($4.8 billion) of one-year bills at 2.3437%, up from the 2.2913% rate on the one-year bills it sold in the past two weeks. The bill yield had been steady at 2.0929% for four months before it was raised to 2.2913% after the PBOC’s recent interest-rate rise.

The PBOC raised interest rates for the first time in nearly three years last month to temper inflationary pressures, lifting the one-year yuan lending rate to 5.56% from 5.31%, and the one-year yuan deposit rate to 2.5% from 2.25%.

“The higher bill yield flagged Beijing’s hawkish attitude toward curbing imported inflationary pressure, and I think policy makers will hike benchmark interest rates by another 25 basis points by as soon as the end of the year,” said Chen Xumin, deputy director of the trading department at Nanchong Commercial Bank.

Economists expect China’s CPI to have risen 4.0% in October from a year earlier, accelerating from September’s 3.6% rise, due to higher food prices.

On Saturday, the state-run Xinhua news agency cited Zhu Baoliang, a researcher at the State Information Center, a government think tank, as saying China’s CPI growth rate is unlikely to fall below 4% in 2011 because food prices are expected to maintain an upward trend.

China International Capital Corp. said in a research note Monday that China is very likely to raise the one-year yuan deposit rate to 3.0% in next year to keep inflation expectations in check.

Separately, China’s foreign-exchange regulator on Tuesday announced a series of measures to further crack down on hot money inflows, a main driver of the growing inflationary pressure in China. The measures include strictly managing quotas for the use of short-term foreign debt by financial institutions, and preventing banks from exceeding their forex settlement quotas.

The PBOC didn’t offer any repurchase agreements Tuesday.

The PBOC carries out regular open-market operations Tuesdays and Thursdays.

This week, 67 billion yuan of bills and repurchase agreements are maturing, up from 65.5 billion yuan last week.

The central bank drained a net 500 million yuan from the money market last week through its open-market operations.

-Wang Ming

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