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China central bank steps up money operations

SHANGHAI:  China's central bank is set for a hefty drain of cash for a seventh week in a row and added long term three-year bills to its open market operations on Thursday, stepping up efforts to keep asset prices and inflation from rising out of control.

Three-year bills were auctioned for the first time since mid-2008, suggesting the People's Bank of China (PBOC) is increasingly worried that cash is still too abundant in the banking system amid rebounding property prices in major Chinese cities and after two purchasing managers' indexes last week pointed to brisk first-quarter GDP growth.

The resumption was considered a signal that eventual monetary policy tightening was drawing closer, but traders said the PBOC may want to rely on fund drains via bill sales for now before raising bank reserve ratios or benchmark interest rates.

"The central bank may wait to raise reserve ratios until it can no longer keep draining funds through bill sales, and may wait to raise interest rates until inflation rises above the target," said a trader at a domestic bank in Shanghai.

The stepped-up open market operations nevertheless suggested rising concern about the risk of overheating in the economy, especially in the real estate sector.

"The central bank aims to prevent expectations for property price rises from becoming entrenched," said Shi Lei, analyst at Bank of China, noting that three-year bills lock up funds for a longer period than money drains via its other bill sales with tenors of three months and one year.

RISING CONCERNS

The official People's Daily's overseas edition on Thursday quoted Chen Dongqi, researcher under the National Development and Reform Commission, the top economic planner, as saying China's economy would grow by more than 10 percent in 2010, up from 8.7 percent in 2009.

The auction yield on the three-year bills came in at 2.75 percent, above market forecasts which had centred around 2.7 percent, showing demand was lukewarm given concerns about future tightening of monetary policy.

But the result remained below Wednesday's indicative secondary market bid yield of 2.7636 percent for three-year financial bonds issued by Chinese banks, according to Reuters Reference Rates.

The PBOC also sold three-month bills in its open market operations on Thursday at a yield unchanged from last week, traders said, in line with market expectations. The auction yield has been at 1.4088 percent since Jan. 21.

The PBOC drained 15 billion yuan (RM7.1 billion) via the sale of three-year bills, which will be issued every other week, and mopped up another 75 billion yuan via three-month bills and 60 billion yuan through 91-day bond repurchase agreements.

On Tuesday, it drained 60 billion yuan via a sale of one-year bills and mopped up another 80 billion yuan through 28-day bond repurchase agreements.

With a total of 180 billion yuan in central bank bills and repos maturing this week, the PBOC appears set to soak up a hefty net 110 billion yuan from the market for the week. Last week it drained 163 billion yuan - Reuters

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