China will hold an auction Wednesday for all commercial banks as it seeks to deposit government cash with them for the first time this year as it tries to bolster returns on the money.

 

The move, which comes at a time of large initial public offerings in the domestic stock markets, reflects the government's intention to minimize liquidity pressure of pumping funds into the banking system.

 

The central government will place 30 billion yuan (US$3.89 billion) of cash from the treasury with lenders for six months ended on August 25, according to the Central Treasury Cash Management Operational Office.

 

China initiated a campaign in June last year to use government cash to buy back treasury bonds and be deposited at commercial banks. Commercial banks can bid for the rates at which they would like to accept the deposits.

 

The Ministry of Finance deposits most of its 1.42 trillion yuan in treasury funds at the central bank, with an annual interest rate of 0.72 percent.

 

The central government in December for the first time deposited 20 billion yuan of cash from the treasury with lenders for a three-month period ended March 6, with an annualized coupon of 2.7 percent.

 

The People's Bank of China, the central bank, has set the benchmark three-month deposit rate at 1.98 percent, with a 2.43 percent rate on the half-year deposits.

 

"I don't expect the rate will be high enough to match that of last year's auction, which was bolstered by banks' need to meet targets on deposits," said a Shanghai-based trader, who asked to remain anonymous.

 

"The timing is well chosen to coincide with big stock sales to help, not add too much pressure on, the liquidity side."

 

Mainland retail investors will have the option to subscribe for yuan-backed A shares of Bank of Communications today, which is likely to raise more than US$3.2 billion. The funds will be unfrozen next Monday.

 

(Shanghai Daily April 25, 2007)