China's central bank issued 101 billion yuan (US$13.3 billion) in three-year directional bills last Friday to rein in snowballing commercial bank lending, prompting further speculation over an imminent rise in interest rates.

"Interest rate hikes have followed the issuance of central bank bills since May 2006," said Dong Dezhi, an analyst with the global financial market department of Bank of China (BOC).

He said the central bank would see more immediate effect by issuing directional bills than increasing interest rates. "If the central bank issues the bills after rate hikes, it will have to pay more for the issuance. This will add to the cost of curbing excessive liquidity," he added.

Traders with China Construction Bank (CCB) said the issuance would help suppress rampant bank lending as some commercial banks still have more than enough deposits despite the deposit reserve rate being raised seven times.

The nation's four state-owned commercial banks, or the Big Four, subscribed to the majority of the bills with an interest rate of 3.6 percent.

The CCB purchased 24 billion yuan in bills, the Agricultural Bank of China 19 billion yuan, the Industrial and Commercial Bank of China 18 billion yuan, and BOC 14 billion yuan.

Other commercial banks such as China Minsheng Banking Co. Ltd. and China CITIC Bank also subscribed for the bills. China Minsheng Banking Co. Ltd., which saw rapid lending growth in the first six months, purchased 9.5 billion yuan.

It was the third time in this year the central bank issued bills to draw excess currency from commercial banks. On March 9 and May 11, the central bank issued bills worth more than 200 billion (US$26.3 billion) in total to rein in excessive liquidity.

According to the central bank data released on July 11, the nation's commercial banks lent up to 2.5 trillion yuan (US$329 billion) in the first half of the year, approaching 80 percent of last year's total. In June alone, these banks approved loans valued at 451.5 billion yuan (US$59.4 billion).

(Xinhua News Agency July 17, 2007)