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China Guides Bill Yields Higher, Seeks to Curb Loans

Jan. 7 (Bloomberg) — China’s central bank sold three-month bills at a higher interest rate for the first time in 19 weeks after saying its focus for 2010 is controlling the record expansion in lending and curbing price increases.

The People’s Bank of China offered 60 billion yuan ($8.8 billion) of bills at a yield of 1.3684 percent, four basis points higher than at last week’s sale, according to a statement. Policy makers will seek “moderate” loan growth to support the economy while managing inflation expectations, the bank said yesterday in a report on its annual work meeting.

“It’s definitely a signal that the central bank is tightening liquidity,” said Jiang Chao, a fixed-income analyst in Shanghai at Guotai Junan Securities Co., the nation’s largest brokerage by revenue. “The rising yield is used to prevent excessive growth in bank lending.”

Premier Wen Jiabao said on Dec. 27 that last year’s doubling in new loans had caused property prices to rise “too quickly,” while surging commodity costs were increasing inflationary pressure. Liu Mingkang, the top banking regulator, wrote in an opinion piece in Bloomberg News this week that “structural bubbles threaten to emerge” in the world’s fastest-growing economy.

The Shanghai Composite Index fell 0.6 percent, led by Bank of China Ltd. and Industrial & Commercial Bank of China Ltd. The yield on the 2.18 percent treasury note due September 2012 climbed three basis points to 2.45 percent, according to quotes provided by the China Interbank Bond Market. A basis point is 0.01 percentage point.

Inflation Risk

Credit growth has slowed since July after the regulator told lenders to pace their lending to avoid possible asset bubbles. The government has also tightened tax and mortgage rules for second-home purchases.

“There’s no doubt that lending has been excessive and that explains why policy makers are starting to be more cautious about lending this year,” said Qu Hongbin, chief China economist for HSBC Holdings Plc in Hong Kong.

Guotai Junan’s Jiang said the yield on one-year bills will climb in open-market operations next week, following the resumption of gains for rates on three-month notes. The yield will increase about four basis points from the 1.7605 percent level it’s been kept at since Aug. 11, he predicted.

The central bank resumed sales of one-year bills on July 9 after an eight-month suspension to help drain cash from banks. Higher bill yields may encourage lenders to part with more cash, reducing funds in the banking system available for loans.

Lending Boom

Qu estimates new loans will be limited to 7 trillion yuan ($1 trillion) in 2010. Banks extended an unprecedented 9.21 trillion yuan of loans in the first 11 months of 2009, compared with 4.15 trillion yuan a year earlier.

The China Banking Regulatory Commission recommends lending this year should be between 7 trillion yuan and 8 trillion yuan, a person familiar with the matter said last month. Banks should guard against risks including overly-rapid credit growth, the People’s Bank of China said yesterday.

The central bank said it would curb volatility in lending, monitor the property market and “stabilize the stock market’s operations,” without elaborating on the latter comment. It reaffirmed a “moderately loose” monetary policy.

The statement contrasted with the start of 2009, when the central bank targeted “appropriate” increases in lending and money supply and said monetary policy would play “a more active role in promoting economic growth.”

‘Moderately Loose’ Policy

Policies may be adjusted this year according to the performances of the domestic and international economies, the global financial crisis, and liquidity levels, the People’s Bank of China said.

Consumer prices climbed 0.6 percent in November from a year earlier, snapping a nine-month run of declines. The central bank is on alert for inflation after economic growth accelerated to 8.9 percent in the third quarter of 2009, the fastest in a year.

The government has pledged to curb excessive property-price increases in some parts of the country and Housing Minister Jiang Weixin said yesterday that the nation will limit credit for some home purchases to reduce speculation.

Prices across 70 cities rose at the fastest pace in 16 months in November, gaining 5.7 percent from a year earlier, led by Shenzhen, Wenzhou and Jinhua.

Property Prices

The central bank will “closely watch changes in the property market, strictly implement relevant property lending policies and promote the healthy development of property finance,” its statement said.

The People’s Bank of China will also seek to prevent “abnormal volatility” in lending between quarters and at the month-end, it said.

The central bank didn’t state a 2010 target for growth in M2, the broad measure of money supply, after overshooting a 17 percent goal last year. The actual rate was more than 25 percent for most of 2009, rising to a record 29.7 percent in November.

The central bank said it will ensure adequate credit growth, guide the pace of lending and encourage the flow of money into existing projects rather than new ones.

The People’s Bank of China reaffirmed its commitment to a “stable” yuan and said it will aim for balanced international payments. China has rebuffed calls from the U.S. and Europe to let the market set the exchange rate, pegging the yuan at about 6.83 per dollar since July 2008 to help exporters weather the global slump.