China Falls Short on Bill Sale, 1st Time Since June

China’s finance ministry failed to draw enough demand at a bill sale for the first time since June, reflecting a shortage of cash at banks after policy makers raised their reserve requirements twice this month.

The ministry sold 11.6 billion yuan ($1.7 billion) of three-month securities, falling short of its 20 billion yuan target, according to traders at Agricultural Bank of China Ltd. and Bank of China Ltd., who asked not to be identified. The average winning yield was 2.7372 percent, compared with 2.52 percent on outstanding 91-day debt yesterday, said the traders at primary dealers required to bid at the auctions.

The People’s Bank of China raised interest rates last month for the first time since 2007 and is tightening money supply to help curb inflation, which accelerated to the fastest pace in 25 months in October. Guotai Junan Securities Co., China’s largest brokerage by revenue, predicts as many as three increases in benchmark borrowing costs by June 30 next year.

“The demand for short-term bills is pretty weak due to tighter cash availability and the expectation for further rate increases,” said Jiang Chao, a Shanghai-based analyst at Guotai. “People expect the short end of the yield curve to rise faster than the long term in the near future.”

The seven-day repurchase rate, which measures the cost of borrowing money between banks, jumped 67 basis points this week to 2.73 percent, the highest level since September 30. The yield on the 3.29 percent bond maturing in September 2020 rose 22 basis points to 4.12 percent.

‘Not Enough Money’

The central bank raised the deposit reserve-ratio at banks on Nov. 10 and Nov. 19, lifting the measure by a combined 100 basis points. Consumer prices grew 4.4 percent last month from a year earlier.

“There’s just not enough money after reserve requirements were hiked, plus people have expectations of further increases, so they’re being a lot more cautious about what they buy,” said Pin Ru Tan, a Singapore-based strategist at Royal Bank of Scotland Plc.

China failed to draw enough bids at a sale of similar dated treasury bills in June last year as lenders sought higher returns from longer-dated debt to protect against inflation. The central bank also failed to drum up enough support for an auction of 273-day bills and 91-day notes in April, 2009.

Policy makers will use more quantitative and price measures to manage liquidity, Central Bank Deputy Governor Hu Xiaolian said in a statement posted on its website Nov. 24.

The monetary authority yesterday sold 3 billion yuan of bills due in 91 days in open-market operations, the smallest amount this year. The yield remained unchanged at 1.8131 percent in the last two auctions since the PBOC rate increase on Oct. 19.

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