China's central bank suspends bill issue

BEIJING -- The People's Bank of China (PBOC), the central bank, on Thursday suspended its regular issue of bills to inject liquidity into banks to ease tight money supply in the market.

In its regular open market operations this week, the PBOC only auctioned 1 billion yuan ($154 million) of one-year bills at a yield of 3.4019 percent on Tuesday.

Related readings:  Central bank to float 1-year bills on June 7  Central bank to raise 0.5% reserve ratio  Reserves ratio hiked as CPI hits 34-month high

It was the second suspension of bill issue by the central bank since January this year when the PBOC paused bill issue to meet short-term demands for cash ahead of the traditional Chinese Lunar New Year, which fell on February 3.

Offsetting 83 billion yuan worth of bills and repurchase agreements that matured, the central bank released 82 billion yuan of liquidity into the money market this week amid rising demands for liquidity after it ordered major banks to keep 21.5 percent of deposits in reserves beginning June 20.

Bill issue and repurchase agreement operations are two major quantitative tools for the central bank to adjust the banking industry's liquidity through open market operations.

Dealers said the PBOC also carried out reverse repurchase agreements operation this week, releasing another 50 billion yuan of liquidity into two major banks.

"The suspension of bill issue is closely related to the surging Shanghai interbank Offered Rate (Shibor)," said Hu Chao, an analyst with Sunshine Insurance Group Corp. "Liquidity has been very tight recently, and the central bank is under great pressure to take action."

On Thursday, the overnight Shibor rose by 33.25 basis points to 7.47 percent, according to the China Foreign Exchange Trading System. The one-week Shibor jumped 50.83 basis points to 8.835 percent.

China's benchmark interest rate of one-year deposits stood at 3.25 percent.

The short-term liquidity injection by the PBOC did not suggest a shift of the central bank's tightening policy because of rising inflation, analysts said.

The National Development and Reform Commission, the country's top economic planner, said the inflation rate in June will accelerate to about 6 percent from the 34-month high of 5.5 percent in May.