July 9 (Bloomberg) -- China’s first sale of one-year bills from the central bank in almost eight months signals an adjustment away from an “extremely loose” policy and isn’t an attempt to slow the economy, Goldman Sachs Group Inc. said.

The People’s Bank of China sold 50 billion yuan ($7.3 billion) of one-year bills at a yield of 1.50 percent today, according to traders at the Agricultural Bank of China and Industrial Securities Co. That compares with 2.25 percent at the last sale on Nov. 18. It sold 50 billion yuan of three-month bills at 1.05 percent compared with 1.03 percent on July 2, according to the traders, who asked not to be identified.

“We still believe policy makers will likely keep a growth- supportive stance in macro policies, even when they adopt some small tightening like this to absorb excess liquidity on the margin,” economists led by Helen Qiao wrote in a research note late yesterday.

China is seeking to choke off the supply of money to speculative stock market and real-estate investments, without derailing its 4 trillion yuan economic stimulus plan by raising benchmark borrowing costs. The government needs to “fine-tune” monetary policy to prevent asset bubbles, loan defaults and rapid inflation, Zhang Jianhua, head of the central bank’s research bureau, wrote in the China Finance magazine this month.

Government Bill Sale

The government yesterday failed to complete a 28 billion yuan bond sale for the first time as the central bank allowed interest rates to rise in open-market operations of the past two weeks. The Ministry of Finance sold 27.5 billion yuan of one- year notes at a yield of 1.06 percent, compared with 0.89 percent at the last auction of similar-maturity debt in May.

The central bank will soak up 10 billion yuan from the financial system this week as 260 billion yuan of bills and repurchase agreements expire, said Liu Junyu, a bond analyst at China Merchants Bank Co., the country’s sixth-largest lender.

Chinese banks made 1.53 trillion yuan of new loans in June, more than double the amount in May, the central bank said yesterday. M2, the broadest measure of money supply, rose 25.7 percent in May, after a record 26 percent gain in April, the central bank said on June 12.

“It will be mostly net capital draining every week in the future,” said Liu in Shenzhen. “The government is worried the loan surge will fuel asset bubbles and increase inflation expectations.” The central bank may also instruct local banks to curb loan growth, he said.

IPO Resumption

Central bank bills worth 895.5 billion yuan will expire in July, compared with 663 billion yuan in August, Goldman’s report said. If the central bank issues 50 billion yuan in one-year bills once a week for the remainder of this month, it will end up adding 30 billion yuan more capital into the financial market than in May, the report estimated.

The resumption of initial public offerings of shares after a nine-month suspension may also drain funds from the market. China’s securities watchdog has since June 18 allowed three companies, Guilin Sanjin Pharmaceutical Co., Zhejiang Wanma Cable Co., and Your-Mart Co., to proceed with their stock offerings.

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

“This is not the beginning of tightening, it’s just the end of easing,” said Michael Kurtz, Shanghai-based China strategist at Macquarie Securities Ltd. “We’re probably months away, quarters even, from anything on the order of reserve ratio or interest-rate hikes. Once investors see it’s not the beginning of tightening, markets will get through this with very little drama.”

--Judy Chen, Jiang Jianguo. Editors: Sandy Hendry, Simon Harvey

To contact Bloomberg News staff for this story: Judy Chen in Shanghai at +86-21-6104-7047 or Xchen45@bloomberg.net

Last Updated: July 9, 2009 00:10 EDT