China's central bank on Tuesday signaled in its open market operations that it was tightening short-term liquidity at a faster-than-expected pace in response to increasing concerns about the economy overheating.
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The People's Bank of China (PBOC) raised the yield on its 20 billion yuan ($2.9 billion) in one-year bills by about 8 basis points (bps) to 1.8434 percent after holding it steady in the previous 20 auctions, compared with a median forecast among traders that it would go up by just 4 bps.
It also drained a record 200 billion yuan via 28-day bond repurchase agreements, ensuring it will draw net funds from the market this week.
The steps come after reports that bank lending surged in the first week of the year to 600 billion yuan, adding to concerns fuelled by blockbuster trade data for December that the world's third-largest economy is overheating.
"The rise in the auction yield today was much more than an average market forecast of a four-basis-point rise, meaning the central bank has stepped up its draining of liquidity even more strongly than the market had expected," Dong Dezhi, senior money market analyst at Bank of China in Shanghai.
Last week the central bank surprised the market by pushing up the yield on its 3-month bills by about 4 bps to 1.3684 percent after holding it steady since late August, sending stocks and commodities lower on worries about tougher "fine-tuning" of monetary policy.
The market had been expecting the yield to rise at Tuesday's auction but the result, which came in near the top end of forecasts that ranged from 1.77 percent to 1.86 percent, suggested it aims to push up money market rates more quickly.
Long-Term Rate Outlook Intact
In response, traders said short-term bill and bond yields were quoted about 2 bps higher.
However, long-term bond yields were mostly steady since traders still doubt the central bank will raise benchmark lending and deposit rates by more than 54 bps this year, as is already priced into that part of the yield curve.
Interest rate swaps actually eased on profit taking and talk that they had been overshot after last week's surge of 16 to 45 basis points.
The benchmark Shanghai Composite Index which fell as much as 1 percent in early trade after news on the repo volume, but later made up for those losses, closing the morning session up 0.1 percent.
Analysts also took the repo operation as a further sign the PBOC is getting more aggressive at drawing cash from the banking system to rein in lending, although the final amount of net drains for this week will depend on Thursday's money operations.
"Today's repo business is a signal that the central bank is acting to drain funds from the money market because it thinks liquidity is excessive," said Lin Chaohui, analyst at Guotai Junan Securities in Shanghai.
Last week, the central bank conducted a net drain of 137 billion yuan, the biggest weekly net drain since late October, after mopping up a net 6 billion yuan the week before that.
Still, the central bank may temporarily shift to a more generous stance before the Lunar New Year, which falls in mid-February, when the market traditionally faces a funding squeeze, Lin said.
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