China Fails to Attract Enough Buyers in Bill Sales

China Fails to Attract Enough Buyers in Bill Sales

July 10 (Bloomberg) -- China failed to attract enough bidders in a government debt sale for a second time this week on speculation record bank lending will spark inflation in the world’s third-largest economy.

The Ministry of Finance sold 25.1 billion yuan ($3.7 billion) in bills of the 35 billion yuan it had sought, according to traders at China Postal Savings Bank and Industrial Securities Co., who asked not to be identified. The government also failed to complete a bond sale on July 8 for the first time in almost six years.

The auction’s failure reflects concern that Premier Wen Jiabao’s 4 trillion yuan stimulus package will cause bubbles in stock and housing markets, forcing the central bank to tighten monetary policy. The People’s Bank of China this week pushed up money-market rates and drained cash from banks, the biggest investors in the nation’s $2.2 trillion debt market.

“The central bank’s open-market operations suggest concerns that the rapid surge in new bank lending in the first half of this year could fuel inflation,” said Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore. “Some people speculate the central bank will raise interest rates this year but I don’t think they can as global growth slows.”

Rising Yields

The Ministry sold 12.48 billion yuan of 91-day bills at 1.15 percent, compared with 0.84 percent at the last such auction on June 19. It issued 12.65 billion yuan of 273-day bills at 1.25 percent, up from 0.88 percent at a previous sale on June 5.

The People’s Bank of China yesterday resumed one-year bill sales after an eight-month pause, signaling an shift from an “extremely loose” policy, Goldman Sachs Group Inc. said.

Chinese banks extended 1.53 trillion yuan of new loans in June, more than double the amount in May, the central bank said on July 8. Housing sales surged 45.3 percent in the first five months of this year, the National Development and Reform Commission said today.

The Shanghai Composite Index has jumped more than 80 percent from last year’s Nov. 4 low. Guilin Sanjin Pharmaceutical Co. and Zhejiang Wanma Cable Co., the first two companies allowed to go public in China since September, were suspended in Shenzhen trading after surging on their stock market debut today.

More IPOs

“Investors are quite bearish on short-term bonds as the government is probably seeking to curb money supply,” said Shi Lei, an analyst in Beijing at Bank of China Ltd., the nation’s third-largest lender. “More initial public offerings will come, which will further tighten liquidity.”

The yield on the 4.23 percent treasury note due August 2015 surged seven basis points to 2.78 percent, and the price of the security dropped 0.45 per 100 yuan face amount to 108.03, according to the Interbank Bond Market. A basis point is 0.01 percentage point.

China bond yields “have not tracked the V-shape move in U.S. Treasury yields” as the global credit crisis eased, Tim Condon, Singapore-based head of Asia research at ING Groep NV, wrote in a research note today. “Over the next six to 12 months we expect monetary tightening to drive the five-year Treasury bond yield back to 4 percent.”

Rate Outlook

China’s bond market swelled in size by 16 percent in the year-ended March 31, paced by corporate bond sales, according to the Asian Development Bank. Demand has been waning in recent weeks. Before this week’s failed one-year auction, a sale of five-year government securities on July 3 drew bids for 1.42 times the debt on offer, compared with a 1.65 bid-to-cover ratio in a sale of 10-year notes on June 17.

Policy makers will probably refrain from raising interest rates as the government aims for 8 percent economic growth this year to create jobs and maintain social stability, according to a Bloomberg survey of economists. China’s consumer prices dropped 1.4 percent in May from a year earlier, after falling 1.5 percent in April, according to the statistics bureau.

The benchmark one-year lending rate will stay at 5.31 percent and the deposit rate at 2.25 percent this year, according to the median estimate of 15 economists surveyed by Bloomberg News.

“Despite the lack of success in selling the intended amount of bills, it is unlikely that the government would switch its tactics to hiking interest rates,” said Sherman Chan, an economist with Moody’s Economy.com in Sydney. “They are trying to mop up excess liquidity without raising rates.”

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