Shanghai: Traders dumped Chinese bills and bonds yesterday as a money market squeeze triggered by tighter policy and China Construction Bank's huge Shanghai IPO worsened.
"There's panic selling - people are scrambling to raise funds," said a trader at a Chinese bank in Nanjing. "Liquidity is much tighter today than yesterday."
The money market has suffered half a dozen other squeezes this year during big initial public offers of equity, and each time short-term interest rates have quickly pulled back near their previous levels after the IPO has passed.
But the current panic appears to be more serious because it is happening at a time of unprecedented monetary tightening, and after Tuesday's announcement that August inflation jumped to a 10-year high of 6.5 per cent, traders said.
Over the past week, authorities have announced a reserve ratio hike, a 151 billion yuan ($20 billion) issue of special bills and a plan to sell 200 billion yuan of special bonds to the market, while an interest rate hike is expected.
That has left traders unsure about how much liquidity the central bank intends to leave in the market after the IPO is completed, and how much short-term rates will eventually come back down.
"There are too many uncertainties about policy now. The special bond issue really scared the market," said a trader.
