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Strategies & Market Trends : China Warehouse- More Than Crockery -- Ignore unavailable to you. Want to Upgrade?

To: RealMuLan who wrote (1878)	12/10/2003 2:04:46 PM
From: RealMuLan	Read Replies (1) \| Respond to of 6370

China's central bank confronts policy dilemma By James Kynge in Beijing Published: December 9 2003 20:12 \| Last Updated: December 9 2003 20:12 China's central bank was confronting a policy dilemma on Tuesday after its third bond auction in three weeks fell short of target, officials and bankers said. The bond issue was intended to curb money supply growth and reduce the pressure to revalue the renminbi. The People's Bank of China declined to release the results of Tuesday's auction of Rmb30bn $3.6bn) in three- and six-month central bank bills on the Shanghai interbank market. "It is a secret," said one central bank official. But other officials, who declined to be named, said the auction had not gone well. Chinese banks had bought less than the Rmb30bn on offer because interest rates on the bills had been capped at unattractive levels, bankers said. The auction shortfall was the third since mid-November, casting doubt over the central bank's main tool to restrain money supply growth and sterilise the impact from an increase of almost $100bn in foreign currency reserves in the first nine months of this year. As a result, Beijing could struggle to keep a lid on a torrid level of credit growth in the economy, deepening concerns over emerging overcapacity in industries such as steel, autos and aluminium, analysts said. There could also be increased speculation that China will face growing pressure to revalue the renminbi to reduce the build-up of foreign currency reserves. Officials cautioned, however, that Beijing remained deeply reluctant to countenance such a step. In recent months, the central bank has kept loan growth from rising above 23 per cent a month year-on-year, mainly by mopping up liquidity through the issuance of some Rmb600bn in bills in the interbank market since April. The problem now, though, is that although inflation and interbank interest rates have started to rise, the central bank has capped the yield on its three-month and six-month bills at 2.45 per cent and 2.6 per cent respectively. This makes them unattractive to banks. If the central bank were to offer the bills at market rates, it might be taken as a signal that bank interest rates should rise. But the PBoC wants to avoid this because it fears that rising rates could prematurely halt China's growth spurt, officials said. China's trade surged in November to $4.8bn, the second highest monthly total this year. Although the 11-month surplus fell by more than a quarter from the same period a year ago to $19.7bn, the surplus in November reinforced a sense that October's $5.7bn surplus may show a trend. news.ft.com