Listen to article

China's central bank said it will sell three-year bills for the first time since June 2008, prompting speculation it is preparing to raise interest rates and allow gains in the yuan to help curb inflation.

The sale of $2.2bn in the securities tomorrow would be followed by issuance every two weeks, the People's Bank of China said in statement. The bills may yield 2.75 per cent at the sale, compared with 1.93 per cent on one-year bills sold yesterday, according to the median estimate in a Bloomberg News survey of nine finance companies.

Selling higher-yielding bills may be a precursor to the first increase in benchmark lending rates in more than two years and allowing yuan gains, said Jiang Chao, an analyst at Guotai Junan Securities Co., the nation's largest brokerage by revenue. Policy makers from China to India have begun withdrawing economic stimulus this year, seeking to prevent asset-price bubbles as Asia leads the recovery from a global recession.

'This is meant to pave the way for the central bank to raise interest rates or resume yuan appreciation,' said Jiang. 'The PBOC can drain liquidity by issuing bills if the interest- rate hike or appreciation attracts more hot money.'

China's stocks dropped for the first time in four days, led by developers. The Shanghai Composite Index fell 0.3 per cent to 3,148.22 at the close. The seven-day repurchase rate, which measures interbank funding availability, rose eight basis points to 1.7 per cent.

Yuan forwards traded near an 11-week high on speculation China will end a 21-month-old peg to the U.S. dollar to help curb inflationary pressures. US Treasury Secretary, Timothy F. Geithner said China needed to make its own decision on when to revalue the yuan. Twelve-month non-deliverable forwards were at 6.6295 per dollar, reflecting bets the currency would strengthen 2.8 per cent from the spot rate of 6.8254.

The People's Bank is targeting a drop of 22 per cent in new lending this year from 2009's record 9.59 trillion yuan and had told banks twice this year to set aside more cash as reserves. India increased interest rates last month for the first time in almost two years. Australia's central bank has raised borrowing costs in five out of the past six meetings.