Chinese bill and bond yields were generally mixed on Friday despite strong August economic data, as the market continued to believe the central bank would conduct little if any further fine-tuning of monetary policy for now. The government said annual consumer price deflation moderated to 1.2 percent in August, against economists' forecasts of 1.3 percent, and from 1.8 percent in July.
Banks extended 410.4 billion yuan ($60 billion) in new yuan loans in August, more than the about 370 billion yuan that two sources told Reuters early this week, and up from 355.9 billion in July. But traders said deflation eased in August because of food price rises, allowing the authorities to use supply-side measures rather than monetary policy to keep future inflation, which is expected to return in October or November, in check.
And with 276.4 billion yuan in short-term discounted bills maturing in August compared with 198 billion yuan in July, traders said the authorities may have less of a need to clamp down on lending blamed for speculation in the asset markets. "Better than expected economic data may not mean bond yields will rise sharply. The authorities are likely to wait after the third quarter data (due in mid-October) before deciding any change in policies are needed," said a trader at a US bank in Shanghai.
In another sign that a major shift in monetary policy was not on the cards for now, Premier Wen Jiabao said late on Thursday that China would unswervingly apply its policy mix of massive government spending and loose money because its economic recovery remains fragile. Wen also added that China should be alert and prevent all potential risks, including inflation.
Although that was the first reference by a cabinet member showing concern in inflation since monetary policy easing last year, traders said the authorities may want to keep policy stable before the national holidays in early October, marking the 60th anniversary of Communist rule, to avoid rocking the fragile stock market. The indicative five-year government bond yield edged up to 2.8730 percent bid on Friday from 2.8713 percent on Thursday, according to Reuters Reference Rates.
But the 20-year yield slipped to 4.0136 percent bid from 4.0155 percent. In the money market, money locked up by Metallurgical Corp of China's IPO started to return to unsuccessful applicants, pushing the weighted average seven-day repo rate to an eight-day low of 1.4385 percent by midday from 1.5398 percent on Thursday.
Metallurgical's IPO locked up a huge 1.6 trillion yuan in subscriptions though smaller than the 1.85 trillion yuan in subscriptions locked by China State Construction Engineering's IPO in July, the world's biggest IPO so far this year. The repo is expected to continue dropping to about 1.3 percent in the next day or so as subcriptions continue to return on Monday.
But traders believe the central bank may revert to moderate net drains in its open market operations in coming weeks after this week's net injection of 40 billion yuan to prevent money market rates from falling too fast, traders said. "The central bank may increase drains in coming weeks to absorb back this week's injections. Bill yields may move sideways for now," said an analyst at a securities company in Shanghai. Reflecting expectations that the central bank may prevent the repo from falling too sharply, the 90-day central bank bill yield, which fell on Thursday, rebounded slightly to 1.3330 percent bid on Friday from 1.3321 percent on Thursday.