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China Guides Bill Yields Higher as Interest-Rate Increase Looms

Jan. 12 (Bloomberg) — China’s central bank sold bills at a higher yield for the second time in a week, increasing the likelihood that policy makers will raise the benchmark interest rate in the first half of the year.

The People’s Bank of China sold one-year bills at a yield of 1.8434 percent after last week guiding three-month rates higher. Lu Ting, a Bank of America-Merrill Lynch economist, said today’s move reflects banks’ expectations for a “moderate” increase in the benchmark rate in 2010.

BNP Paribas SA brought forward its forecast for higher interest rates to the second quarter from the third and said the central bank may raise lenders’ reserve requirements by 50 basis points in February. Credit growth surged last week, local media reported yesterday, and the cabinet said Jan. 10 that the nation is on guard against inflows of speculative capital that may stoke inflation and create asset bubbles.

“The likelihood of an increase in banks’ reserve ratios is on the rise,” said Tao Dong, a Hong Kong-based economist at Credit Suisse Group AG. “Aggressive” lending last week may have encouraged the central bank to guide bill yields higher, Tao said.

The Shanghai Composite Index rose 0.8 percent as of 1:33 p.m. local time. Industrial & Commercial Bank of China Ltd., the nation’s biggest listed lender, dropped 0.4 percent.

UBS AG forecasts an interest-rate increase in May or June after banks’ reserve requirements rise this quarter.

Bigger Than Forecast

Today’s yield increase of 8 basis points was the first since August for the one-year securities and exceeded the 4 basis point median forecast of 15 traders and analysts surveyed by Bloomberg News. On Jan. 7, the central bank allowed the yield on its three-month bills to climb 4 basis points to 1.3684 percent, the first increase in 19 weeks.

Banks lent about 100 billion yuan ($14.6 billion) each day last week, the official China Securities Journal reported. That compares with 294.8 billion yuan for all of November. December data is yet to be released.

While Chinese lending is typically biggest at the start of each year, the central bank said last week that it is aiming for “moderate” credit growth in 2010 after a record 9.21 trillion yuan of loans in the first 11 months of 2009.

Economists are ratcheting up 2010 inflation forecasts for China. Citic Securities Co., the nation’s biggest listed brokerage, raised its estimate to 3.2 percent from 2.6 percent in a report dated yesterday. Bank of America Merrill Lynch last week increased its forecast to 3.1 percent from 2.5 percent.

Inflation Threat

Premier Wen Jiabao pledged Dec. 27 to curb excessive property-price gains in some parts of China after the biggest nationwide increase in 16 months in November.

“Monetary policy is being gradually tightened as China faces very significant inflationary pressure and credit growth that is too fast,” said Isaac Meng, senior economist at BNP Paribas in Beijing. “By hiking this bill rate, the central bank is sending a clear tightening signal to the banks.” He said the central bank may initially raise interest rates by 27 basis points.

China’s benchmark one-year lending rate is at a five-year low of 5.31 percent, and the reserve requirement is 15.5 percent for big banks.

The central bank had kept the one-year bill rate steady since Aug. 11 in line with its “appropriately loose” monetary policy to help revive the economy. Now, growth is bouncing back, with exports climbing 17.7 percent last month from a year earlier.

The monetary authority sold 20 billion yuan of the one-year securities at the auction today. It also sold 200 billion yuan of securities via 28-day repurchase transactions, a record according to Bloomberg data going back to 2004.

“The central bank may keep its net weekly withdrawal at about 150 billion yuan this month to prevent a possible surge in loans in the first quarter,” said Chen Jianbo, a Beijing-based fixed-income analyst at BOC International Holdings Ltd.