Treasury bill sale falls short of target

PUBLISHED : Saturday, 27 November, 2010, 12:00am
UPDATED : Saturday, 27 November, 2010, 12:00am

The central government's Treasury bill sale received lacklustre interest yesterday, reflecting cash constraints after banks were twice asked to set aside more funds as deposit reserves this month.

The Ministry of Finance sold 11.55 billion yuan (HK$13.44 billion) of 91-day securities, falling short of its 20 billion yuan target, according to a statement on the website of China Central Depository & Clearing.

The reserve requirement ratio was raised twice this month, each time by 0.5 percentage point, to freeze combined liquidity of about 710 billion yuan in the banking system. The adjustments sent the reserve ratio to a historic high of 18 per cent for big lenders.

The moves followed the first interest rate rise since the financial crisis and a temporary increase in the ratio last month, when consumer inflation hit a 25-month high of 4.4 per cent.

The Export-Import Bank of China yesterday sold 16.54 billion yuan of one-year notes at auction, lower than its 20 billion yuan target, according to bank traders.

'The demand for short-term bills is limited because cash availability is tighter and the expectation for further interest rate increases is high,' said Lu Zhengwei, an economist with Industrial Bank.

Many economists have predicted that interest rates will be increased by 0.25 percentage point next month. Lu forecasts the rise to come between December 7 and 18.

The seven-day repurchase rate, which measures the cost of borrowing between banks, jumped 67 basis points this week to 2.73 per cent, the highest level since September 30.

Mao Junhua, an analyst with China International Capital Corp, said lenders must reduce their interbank and bond assets to meet the new reserve requirement.

'If M2 sees a relatively sharp decline next year, pressure on banks' deposit growth will eventually appear,' Mao said.

The growth of M2, a money supply measure that includes cash and bank deposits, quickened to 19.3 per cent year on year last month from 19 per cent in September. The government is widely expected to curtail M2 and loan growth targets next year to ease inflation pressure.

Outstanding deposits rose 19.6 per cent year on year to 70.8 trillion yuan at the end of last month. The increase was 8.3 percentage points lower than a year ago. Household deposits fell 700.3 billion yuan on the month as people flooded to asset markets while inflation kept climbing and real interest rates remained in negative territory.

Banks are competing for depositors by offering higher interest rates and gifts.

Li Yamin, an analyst with Shenyin & Wanguo Securities, said bank profits would be reduced by 0.68 to 1.86 per cent next year if banks had to cut loans to meet the raised reserve ratio.

Net income is expected to drop 0.14 to 0.6 per cent if lenders cut bond holdings to meet the requirement, she said.

Below target

Of the 20 billion yuan of bills, the government sold only 11.5 billion yuan

The amount of funds, in yuan, frozen in the bank system after this month's two increases in reserve requirement ratio: 710b yuan