(Chinadaily.com.cn)
Updated: 2007-07-16 12:54

China's central bank said on Friday it had issued 101 billion yuan in three-year bills in a special issue at a yield of 3.60 percent as Beijing ups its battle against excess liquidity in the system.

This was the first time the People's Bank of China (PBOC) had used special bills to drain liquidity since it sold 101 billion yuan in such three-year bills in May.

Banks, which are obliged to buy the bills, said the PBOC sent a warning to commercial banks against excessive lending by fixing the yield on the special bills below the 3.62 percent yield on the three-year paper sold in Thursday's regular open market operations.

By selling the special bills to absorb funds instead of using a rise in the bank reserve requirement ratio, the central bank is aiming to avoid volatility in money market rates, they said.

"The central bank thinks liquidity in the market is still too ample now, so it used special bills to drain funds by nearly the same amount of funds that would have been drained by a reserve ratio hike," said a trader at a big Chinese bank, adding that the current 11.5 percent reserve ratio was already high.

The central bank gave no details, but banking sources said payment for the special bills was due on Friday.

The bonds included 75 billion yuan sold to China's four major banks -- Agricultural Bank of China, Bank of China, China Construction Bank and International and Commercial Bank of China, the sources said.

A slew of strong economic data for June issued this week, including rapid money supply growth and a record monthly trade surplus of $26.9 billion, has sparked speculation that Beijing would launch another round of tightening soon.

Annual growth in China's broad M2 money supply accelerated to 17.06 percent in June from 16.7 percent in May -- much higher than a median forecast of a 16.5 percent rise by 15 economists polled by Reuters.

Chinese banks extended new yuan loans of 451.5 billion yuan in June, compared with 247.3 billion yuan in May and 422 billion yuan in April, official data showed.

"All this points to further monetary tightening in coming months, with the most likely measures being at least two hikes in both deposit and lending rates, another four hikes in deposit reserve ratio," HSBC economist Qu Hongbin said in a research report on Thursday.