China Central Bank Suspends Open Market Operations (Update1)

China Central Bank Suspends Open Market Operations (Update1)

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By Zhang Dingmin and Jake Lee
Nov. 22 (Bloomberg) -- The People's Bank of China will halt regular open-market operations for a day tomorrow, adding to speculation that increases in the reserves requirements are succeeding in draining cash from the economy.
A Chinese central bank spokesman said the decision was based on an evaluation of market conditions and declined to elaborate. Three increases this year in the amount of reserves banks need to set aside have pushed up money-market yields.
The yield on a 2 billion yuan ($254 million) sale of one- year central bank bills was 2.82 percent yesterday, compared with 2.79 percent at sales in the past seven weeks. The central bank has been selling its own currency to stop it from strengthening, pumping funds into the financial system.
``They're startled by the ongoing rise in yields and they're signaling enough is enough,'' said Tim Condon, chief Asia economist at ING Bank NV in Singapore. ``Every day they don't intervene is going to put downward pressure on yields.''
The central bank's open market operations include selling bills to banks and repurchasing bonds on Tuesdays and Thursdays to adjust liquidity in the financial system. The bank has ordered banks to set aside more funds three times this year to reduce their lending capacity and slow down loan growth.
Since the end of a fixed exchange rate in July 2005, China's central bank has limited gains in the yuan to 2.9 percent against the U.S. currency by purchasing dollars and keeping yuan money-market rates stable.
The central bank lifted its one-year lending rate twice this year to 6.12 percent to cool the world's fastest-growing major economy. While the lending rate sets a minimum borrowing cost for bank loans, it doesn't directly influence money-market rates.