WRAPUP 2-China raises expectations of more rate rises

* C.bank unexpectedly increases bill yield at auction

* Analysts take as sign of monetary tightening to come

* Forex regulator vows steps to curb “hot money” inflows

* C.bank officials caution on inflation, asset bubbles

* More criticism of Fed’s quantitative easing

(adds yuan fluctuation)

By Jason Subler and Aileen Wang

SHANGHAI/BEIJING, Nov 9 (BestGrowthStock) – China signalled its
intention on Tuesday to drain excess cash from its financial
system by unexpectedly raising the yield on bills at a central
bank auction and announcing new rules to curb hot money inflows.

One of the measures directed against inflows — requiring
banks to hold a minimum amount of dollars overnight — sparked a
day of unprecedented yuan volatility, with the Chinese currency
ending sharply up against the dollar.

Taken together, the moves flagged China’s increasing concern
about a surge in liquidity after the U.S. Federal Reserve
launched another round of quantitative easing, prompting some
analysts to say monetary tightening may be closer than thought.

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China’s comments ahead of G20 summit [ID:nN08254228]

China, after growth-salvaging stimulus [ID:nSGE6A805Q]

Capital flows to emerging world: http://r.reuters.com/hep83q

China c.bank open market operations [CN/MMT]

Preview of October CPI [ID:nTOE6A305I]

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The expectations were fuelled by comments from two central
bank deputy governors that the Fed’s easing could lead to asset
bubbles and inflation and that Chinese authorities were keeping
a close eye on the situation. [ID:nBGN9ME62J] [ID:nBJB003995]

“China still has a strong momentum of rapid credit
expansion,” said Du Jinfu, one of the deputy governors, in
summing up the challenges facing the central bank.

“There is obviously an increase in cyclical macro-economic
risks such as excessive liquidity, inflation, bad debts and
asset bubbles,” Du told a financial conference.

Shortly before Du’s comments, the central bank surprised
markets by ramping up the yield on one-year bills to draw cash
out of the financial system.

It sold the bills at a yield of 2.3437 percent, more than 5
basis points higher than levels at auctions since just after the
central bank raised its benchmark interest rates in mid-October.
[CN/MMT]

Markets were even more surprised by the yuan’s moves on the
day. The Chinese currency registered its largest intraday price
movement since its July 2005 revaluation after the foreign
exchange regulator imposed a minimum on forex positions that
banks must hold overnight. [ID:nTOE6A808N]

This caused a scramble for dollars, weighing on the yuan.
But it soon rebounded to score its biggest daily
post-revaluation gain amid rumours of central bank intervention
to push it higher.

Several market participants said that they saw no evidence
of such an intervention by the central bank, however.

RATE RISE ON WAY?

Analysts and traders took the yield increase as a sign that
the central bank could raise rates again, or increase banks’
required reserves.

“The auction yield itself already suggests a possible rate
hike is coming soon,” said a senior trader at a Chinese bank in
Shanghai. “Previously, rises in the auction yield of one-year
bills often pointed to a quick follow-through rate hike.”

Analysts said the central bank wants to prevent a flood of
cash from generating runaway inflation and price bubbles in
asset markets, particularly stocks and property.

Annual consumer inflation rose to a 23-month high of 3.6
percent in September and analysts polled by Reuters expect data
on Thursday to show it climbed to 4 percent in October.
[ID:nTOE6A305I]

Complicating matters is an apparent surge in cash seeking a
home in China, as evidenced by sharp fall in short-term money
market rates last week. [CN/]

Not only are funds being shifted from bank deposits and
property into the stock market, helping the main Shanghai index
(.SSEC: ) rise around 18 percent since the start of September, but
there are signs speculative capital inflows are on the rise.

MORE CRITICISM FOR QE2

While Beijing maintains strict capital controls, some hot
money finds its way into the country disguised as trade or
foreign direct investment, which the State Administration of
Foreign Exchange (SAFE) said it would address further.

SAFE published rules on its website on Tuesday aimed at
strictly managing firms’ short-term foreign debt quotas as part
of efforts to curb speculative capital inflows. [ID:nBGN9ME62H]

“The rules out this morning are a clear attempt to crack
down on hot money inflows and outflows, as well as to cut down
on the ability of onshore corporates to take short USD positions
through the onshore forwards market,” Stephen Green, China
economist with Standard Chartered in Shanghai, said of SAFE’s
announcement.

“China has already done a lot in terms of controlling access
to onshore asset markets, particularly real estate, so that’s a
positive as it makes it harder to hold CNY (yuan). But given CNY
has been weakening against most Asian currencies, the temptation
of many will be to bring in funds.”

Still, SAFE’s deputy chief, Deng Xianhong, was quoted by the
China Securities Journal as saying so far China has not seen
large inflows of speculative funds betting on the yuan rising.
[ID:nTOE6A800Q]

Keeping up a drumbeat of comments critical of the Fed’s
quantitative easing ahead of the G20 leaders’ summit in Seoul,
Ma Delun, deputy governor of the PBOC, told a financial forum in
Beijing that the Fed’s steps could have a negative impact on the
global economy in part by encouraging such capital flows.
(Additional reporting by Xie Heng, Zhao Hongmei, Ben Blanchard
and Simon Rabinovitch in Beijing and Zhong Hua, Lu Jianxin and
Soo Ai Peng in Shanghai; Editing by Ken Wills)

WRAPUP 2-China raises expectations of more rate rises