SHANGHAI - China's government bonds declined on speculation a report may show this week that inflation quickened in May, spurring concern policymakers will push money-market rates higher.

Consumer prices climbed 3.1 percent from a year earlier, compared with 2.8 percent in April, Reuters said, citing three unnamed people who said a government official stated the figures on Wednesday. The People's Bank of China (PBOC) on Tuesday raised the yield on one-year bills to 2.0929 percent, from 2.0096 percent last week.

"Investors are worried inflation expectations will rise and the PBOC will continue to raise interest rates on one-year bills," said Chen Liang, a bond analyst at Guohai Securities Co in Shenzhen. "Also, the funding availability is still a bit tight."

The yield on the 1.77 percent note due December 2013 climbed three basis points to 2.56 percent as of 3:41 pm in Shanghai, and the price of the security dropped 0.1 per 100 yuan face amount to 97.37, according to the National Interbank Funding Center. A basis point is 0.01 percentage point.

China's finance ministry sold 28 billion yuan ($4.1 billion) in five-year bonds at an average yield of 2.53 percent, according to a statement on the website of Chinabond, the nation's largest debt clearing house. The yield was higher than the market expectation of 2.5 percent, according to Guohai's Chen.

The seven-day repurchase rate, which measures funding availability between banks, climbed for a second day, gaining two basis points to 2.21 percent, according to a daily fixing rate published by the National Interbank Funding Center.

Forwards changed

Yuan forwards were little changed before government reports in the next two days that will probably show exports increased and inflation accelerated.

The world's fastest-growing major economy still doesn't have a "solid" recovery in domestic demand, and has to sustain consumer spending growth, the central bank said on Tuesday. Europe's debt crisis has fueled a 13 percent surge in the yuan against the euro in the last three months, making China's overseas shipments to the 16 nations that share the single currency more expensive.

"It's still a strong growth story and they still need currency reform, the only question is whether now is the right time," said Callum Henderson, Singapore-based global head of foreign-exchange strategy at Standard Chartered Plc. "China and other Asian countries will want to see how export growth is impacted by weaker European demand."

Export growth

The yuan's 12-month non-deliverable forwards traded at 6.7895 per dollar, from 6.7870 on Tuesday, according to data compiled by Bloomberg. The contracts reflect bets the currency will strengthen 0.6 percent from the spot rate of 6.8287.

China exported $8.2 billion more than it imported last month, according to the median estimate of economists in a Bloomberg News survey. Goods shipped increased 32 percent from a year earlier, after rising 30.5 percent in April, the survey showed.

Exports grew about 50 percent from a year earlier and new loans were 630 billion yuan ($92 billion), Reuters said.

Bloomberg News

(China Daily 06/10/2010 page17)