China, Taiwan keep tightening, fearing asset bubbles

Tue Jan 19, 2010 7:30am EST
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By Karen Yeung and Roger Tung

SHANGHAI/TAIPEI (Reuters) - The central banks of China and Taiwan tightened policy on Tuesday to drain money from the banking system, marking intensified efforts in the region to head off inflation and cool asset bubbles.

A week after raising bank reserve ratio requirements for the first time since June 2008, the People's Bank of China (PBOC) lifted the auction yield on one-year bills in its regular open market operation for a second week in a row, and by more than expected.

Premier Wen Jiabao told a cabinet meeting that China would take steps to deal with inflationary expectations.

"China will maintain reasonable growth in money supply and credit, focus on optimizing the credit structure and carefully manage the pace of lending to reduce financial risks," Wen said, according to a statement posted on the government's website,

Taiwan also nudged up its overnight lending rate, the rate at which banks borrow and lend to each other, by one basis point to an eight-month high.

Financial markets, including high yielding assets, dipped because of expectations of further monetary tightening, with the Australian dollar slipping from a 26-1/2-month high against the euro and Shanghai shares .SSEC easing off their early highs.

"The (bill auction) result shows the central bank signal that is still tightening liquidity to cool the surge in bank lending," said Shi Lei, analyst at Bank of China in Beijing. He added the market expected the one-year bill yield to rise to about 2.1 percent in coming weeks from 1.9264 percent at Tuesday's auction.

Indian bond yields also rose after the country's chief statistician said inflation might hit double digits by March, raising the prospect of policy tightening.   Continued...