China Money Rate Rises to 19-Month High Before Bond Sale; Bill Yields Rise

China’s money-market rate rose to a 19-month high on speculation investors were borrowing funds to purchase bonds from Bank of China Ltd. at a sale tomorrow and as the central bank pushed up bill yields to drain cash.

Bank of China plans to raise 40 billion yuan ($5.9 billion) from convertible notes to replenish capital, according to a statement published on the Shanghai Stock Exchange on May 30. The People’s Bank of China increased the interest rate on one-year bills at an auction today for the first time in four months to encourage investors preferring higher yields to part with funds.

“Banks’ cash availability has become tighter and the funding needs of many institutions intending to buy Bank of China debt further drove up rates,” said Chen Jianbo, a Beijing-based fixed-income analyst at BOC International Holdings, the investment banking arm of Bank of China. “Higher PBOC bill yields also had an impact on money rates.”

The seven-day repurchase rate, which measures the cost of borrowing money between banks, jumped 69 basis points to 3.2 percent at the 11 a.m. fixing, the highest level since October 2008, according to a daily rate set by the National Interbank Funding Center. It climbed 91 basis points in May, the biggest monthly increase since October 2007.

Chinese banks are under pressure to replenish funds after the central bank ordered lenders to set aside more deposits as reserves for a third time this year and loans rose to a record 9.59 trillion yuan in 2009.

‘So Tight’

Bank of China, the nation’s third-largest lender by market value, is offering notes maturing in six years that can be converted into yuan-denominated A shares starting six months after issuance at 3.88 yuan each, according to the statement to the stock exchange.

The central bank sold 15 billion yuan of the one-year bills, compared with 30 billion yuan a week ago. The yield rose to 2.0096 percent, from 1.9264 percent.

“Liquidity is so tight that no one would buy one-year bills in open-market operations if the central bank doesn’t raise the yield,” said Jiang Chao, an analyst in Shanghai at Guotai Junan Securities Co., the nation’s largest brokerage by revenue. “The authorities also need to increase yields on shorter-dated securities as inflation picks up.”

Consumer prices rose 2.8 percent from a year earlier in April, the fastest increase in 18 months, and property prices jumped a record 12.8 percent, official figures show. The government’s goal of keeping inflation under 3 percent this year “will be a difficult task,” Yao Jingyuan, chief economist at the China statistics bureau, said May 28.

China PMI

Yuan forwards weakened for a second day after China’s manufacturing expanded at a slower pace last month, making the case for currency appreciation less compelling as the world’s third-largest economy cools.

Traders have pared bets that China will loosen its exchange-rate reform as the debt crisis in Europe raised concern growth in that region will slow, reducing demand for Asian exports. The yuan has gained 18 percent against the euro this year as investors steered away from the single European currency.

The Purchasing Managers’ Index fell to 53.9 from 55.7 in April, the Federation of Logistics and Purchasing said. A separate purchasing managers’ index compiled by HSBC Holdings Plc and Markit Economics showed the gauge dropped to 52.7 in May from a revised 55.2 in April. A number above 50 indicates expansion.

‘Off the Table’

The world needs to guard against the possibility of a second economic slump, Premier Wen Jiabao said yesterday.

Yuan appreciation is “off the table for the time being,” said Mitul Kotecha, head of global currency strategy in Hong Kong at Credit Agricole CIB. “Given the weakness in the euro and the stronger dollar, the yuan has de-facto strengthened anyway in recent months, so Chinese authorities will probably say they want to wait and see less volatility before they decide to move on the currency.”

Twelve-month non-deliverable forwards fell 0.4 percent to 6.7766 per dollar late in Hong Kong, reflecting bets the yuan will strengthen 0.8 percent from the spot rate of 6.8302.

To contact the reporter on this story: Belinda Cao in Beijing at lcao4@bloomberg.net Bob Chen in Hong Kong at bchen45@bloomberg.net;

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