Monday 13 July 2009

Debt sale flounders

China's stimulus plan is large. I just don't like the size of it. Nor it appears does the market.

The plan has already caused a bubble in the stockmarket in my opinion.

China Fails to Attract Enough Buyers in Bill Sales [Bloomberg]

July 10 (Bloomberg) -- China failed to attract enough bidders in a government debt sale for a second time this week on speculation record bank lending will spark inflation in the world’s third-largest economy.

The Ministry of Finance sold 25.1 billion yuan ($3.7 billion) in bills of the 35 billion yuan it had sought, according to statements on the Web site of Chinabond, the nation’s biggest debt-clearing house. The government fell short of its target in a bond sale for the first time in almost six years on July 8.

The auction’s failure reflects concern that Premier Wen Jiabao’s 4 trillion yuan stimulus package will cause bubbles in stock and housing markets, forcing the central bank to tighten monetary policy. The People’s Bank of China this week pushed up money-market rates and drained cash from banks, the biggest investors in the nation’s $2.2 trillion debt market.

“The central bank’s open-market operations suggest concerns that the rapid surge in new bank lending in the first half of this year could fuel inflation,” said Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore. “Some people speculate the central bank will raise interest rates this year but I don’t think they can as global growth slows.”

Rising Yields

The Ministry sold 12.48 billion yuan of 91-day bills at 1.15 percent, compared with 0.84 percent at the last such auction on June 19. It issued 12.65 billion yuan of 273-day bills at 1.25 percent, up from 0.88 percent at a previous sale on June 5.

The People’s Bank of China yesterday resumed one-year bill sales after an eight-month pause, signaling a shift from an “extremely loose” policy, Goldman Sachs Group Inc. said.

Chinese banks extended 1.53 trillion yuan of new loans in June, more than double the amount in May, the central bank said on July 8. Housing sales surged 45.3 percent in the first five months of this year, the National Development and Reform Commission said today.

The Shanghai Composite Index has jumped more than 80 percent from last year’s Nov. 4 low. Guilin Sanjin Pharmaceutical Co. and Zhejiang Wanma Cable Co., the first two companies allowed to go public in China since September, were suspended in Shenzhen trading after surging on their stock market debut today.

More IPOs

“More initial public offerings will come, which will further tighten liquidity,” said Shi Lei, an analyst in Beijing at Bank of China Ltd., the nation’s third-largest lender. “Investors are quite bearish on short-term bonds.”

The yield on the 2.29 percent treasury note due April 2014 surged five basis points to 2.53 percent, and the price of the security dropped 0.20 per 100 yuan face amount to 98.95, according to the Interbank Bond Market. A basis point is 0.01 percentage point.

“We doubt their aim was to cause distress in the government’s deficit financing effort,” Christian Carrillo, a bond strategist at Deutsche Bank AG in Singapore wrote in a research report today. “It appears the signaling aim of the PBOC has gone wrong especially given our understanding is that top level governors are very uncertain about the economic recovery.”

Rate Outlook

China’s bond market swelled in size by 16 percent in the year-ended March 31, paced by corporate bond sales, according to the Asian Development Bank. Demand has been waning in recent weeks. Before this week’s failed one-year auction, a sale of five-year government securities on July 3 drew bids for 1.42 times the debt on offer, compared with a 1.65 bid-to-cover ratio in a sale of 10-year notes on June 17.

Investments by China will help developing economies regain their growth momentum in the second half of this year, pulling the global economy out of the worst recession in six decades, the International Monetary Fund said on July 8. The IMF forecasts China’s expansion will accelerate to 8.5 percent next year from 7.5 percent in 2009.

Policy makers will probably refrain from raising interest rates as the government aims for 8 percent economic growth this year to create jobs and maintain social stability, according to a Bloomberg survey of economists. China’s consumer prices dropped 1.4 percent in May from a year earlier, after falling 1.5 percent in April, according to the statistics bureau.

The benchmark one-year lending rate will stay at 5.31 percent and the deposit rate at 2.25 percent this year, according to the median estimate of 15 economists surveyed by Bloomberg News.

China’s exports fell for an eighth month, dropping 21.4 percent in June from a year earlier, the state-run Xinhua News Agency reported today, citing customs data.

“Despite the lack of success in selling the intended amount of bills, it is unlikely that the government would switch its tactics to hiking interest rates,” said Sherman Chan, an economist with Moody’s in Sydney. “They are trying to mop up excess liquidity without raising rates.”


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