Nov. 9 (Bloomberg) -- China’s central bank will “fine- tune” monetary policy in the final quarter of this year to prevent a return of inflation, according to a report from the nation’s debt registration association.

The People’s Bank of China will sell 1 trillion yuan ($146 billion) of so-called sterilization bills in open-market operations to drain funds in the final three months of 2009, the National Association of Financial Market Institutional Investors, or NAFMII, forecast in its quarterly report. Maturing bills will send 885 billion yuan back to the market, said the agency, which registers debt sales on the interbank market.

“Appropriate fine-tuning will be made under the precondition that ‘reasonably ample’ liquidity in the banking system will remain” and the central bank will also withdraw money through repurchase transactions, the report said. “Inflation expectations may damp investor demand for credit- based securities,” NAFMII said.

China’s government has adopted what it calls a pro-active fiscal policy and “moderately loose” monetary policy to counter the impact of the global financial crisis. The central bank injected funds into the market in the first three quarters of the year. A net 291.5 billion yuan flowed in during the quarter ended September.

Bond Sales

NAFMII estimates government bond issuance at 400 billion yuan for the final quarter, down from 581.1 billion yuan in the previous three months. A net 603.4 billon yuan of treasury debt was sold in the first nine months of the year, with 260 billion yuan lined up for the fourth quarter, it said.

Companies will issue about 300 billion yuan to 350 billion yuan of debt in the final quarter, compared with total sales of 421.7 billion yuan in the period ended in September, according to the report.

Consumer prices declined 0.8 percent in September from a year earlier. Government data release on Nov. 11 may show prices slid 0.4 percent last month, according to the median estimate in a Bloomberg survey.

About half of 65 interbank bond market participants surveyed by NAFMII forecast China will raise interest rates next year, based on a separate report from the association.

To contact the Bloomberg news staff on this story: Belinda Cao in Beijing at lcao4@bloomberg.net

Last Updated: November 9, 2009 04:31 EST