2011-06-21 15:14

BEIJING -- The People's Bank of China (PBOC), the central bank, on Tuesday auctioned 1 billion yuan ($154 million) of one-year bills at a yield of 3.4019 percent, heightening speculation of an approaching interest rate hike.

The yield on the one-year bills rose 9.61 basis points from last week despite the low issue volume.

The PBOC did not carry out repurchase agreement operations on Tuesday.

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

As a key signal for changes in the benchmark one-year interest rates, the yield of one-year bills heightened the market's speculation of an imminent rate hike, said Sun Wencun, a macroeconomic analyst with the CITIC Securities.

"An interest rate increase is very likely, possibly in July," Sun said.

Market analysts have been closely watching PBOC's open market operations this week as the yield of its one-year bills sold on Tuesday far exceeded the benchmark interest rate of one-year deposits, which stood at 3.25 percent.

In the secondary market, where banks can sell the bills to other investors, the yield of the one-year bills is now around 3.6 percent, thus making banks reluctant to buy those bills from the central bank.

The repurchase rate of overnight bills in China's interbank market was 7.6 percent and 8.3 percent for seven-day bills, indicating tight liquidity in the banking system.

Li Xunlei, chief economist of the Guotai Junan Securities, said the increase of central bank bills or an interest rate hike would be a lagging response to the market.

"Small- and medium-sized enterprises have to endure lending rates much higher than the official benchmark interest rate when they borrow from private sector," Li said.

"Actually, it's the market's interest rate in real terms that is forcing the central bank to raise the interest rate soon," he added.