BEIJING/SHANGHAI China's central bank added fuel to fears on Thursday it was clamping down on inflation risks as it allowed cash to drain from the financial system for a second straight week, sparking a jump in short-term rates.
The move by the People's Bank of China (PBOC) happened as Beijing stepped up its efforts to counter surging property prices in the capital in an attempt to calm rising discontent over the city's record-high home prices.
China also widened the funding options for local governments and property companies by giving them access to the interbank bond market to finance affordable housing, a priority of Chinese leaders, sources told IFR, a Thomson Reuters publication.
Housing data this week has raised fresh concerns about property bubbles in some major cities, which could add to consumer inflation - already at a seven-month high - and add to criticism that home prices are increasingly out of reach of ordinary Chinese.
Zhu Haibin, chief China economist at JP Morgan in Hong Kong, argued the tighter conditions were overdue. A pick-up in the economy had probably reassured the central bank it could raise rates without damaging growth.
"That will increase the determination of the PBOC for credit normalization, for credit tapering. The policy in the last few years overall has been very loose, with credit growth way higher than nominal GDP," Zhu said.
The central bank, which sparked a market panic in June by engineering a cash crunch, refrained from taking part on Thursday in scheduled money market operations for the third consecutive time. It has drained more than 157 billion yuan ($26 billion) from money markets since the week of September 30.
In response, China's seven-day repurchase rate - a benchmark for short-term funds - jumped by nearly a full percentage point to 5 percent at the open on Thursday.
Asia shares fell as investors feared tighter monetary conditions could weigh on China's economic growth.
"Cash demand is going to be high in October because people have to pay taxes and banks have to park reserves with the central bank," said Hong Hao, chief strategist at Bank of Communications International Securities In Hong Kong.
Analysts said one aim of the central bank was to drain excess cash in the financial system that could aggravate the rise in property prices.
Chinese banks made 787 billion yuan in new loans in September, higher than a forecast 650 billion yuan. Bank lending to the property sector picked up in the third quarter compared with the second.
Yuan has also poured into the economy as a side effect of massive intervention by the central bank to curb the strength of a rally in the local currency, which hit a record high on Thursday.
Still, signs that China's giant manufacturing sector is reviving will give the central bank confidence it can push rates higher without endangering economic growth, analysts said.
Economic growth in the July-September quarter was the strongest this year and a preliminary purchasing managers' index for October gave the first insight into how the economy is doing this quarter.
It showed strong new orders drove the fastest expansion in the manufacturing sector in seven months.
Data this week showed China's house prices in September rose 9.1 percent from a year earlier, the sharpest rise since January 2011. House prices in the country's largest cities rose much faster than the national average. They were up 16 percent in Beijing, 17 percent in Shanghai and about 20 percent in the southern cities of Guangzhou and Shenzhen.
The figures provided the latest scare for a government that aims for economic and social stability. It has waged a four-year campaign to try to cool the housing market by restricting purchases, raising the level of down payments and curtailing bank lending to the real estate sector.
Accounting for 16 percent of China's $8.5 trillion economy, the property sector is a crucial growth driver and fuels economic activity in a host of other industries.
But the potential for social unrest due to unequal access to housing has led many to worry that soaring property prices could threaten the country's stability.
To ease public concern that home prices are increasingly unaffordable, the capital vowed to supply 70,000 new homes for middle income families and to punish property speculators.
"We are making this move to further balance the supply of homes, support demand for owner-occupied apartments and stabilize market sentiment," the Beijing housing commission said in a statement on its website.
Other measures included taking houses from speculators if they are found to have skirted controls barring residents from owning more than two homes.
Separately, sources said authorities will allow a wider range of local governments and property developers greater access to funding markets.
The National Association of Financial Market Institutional Investors, which regulates the interbank bond market under the supervision of the central bank, announced the decision during an internal meeting on Tuesday, said one source.
NAFMII has barred property companies from the interbank bond market since 2008 as part of China's efforts to contain property prices. It has also blocked most local government funding vehicles from issuing since December, amid concerns about a build-up of debt in the sector. Only China's four biggest cities - Beijing, Shanghai, Tianjin and Chongqing - and the provincial capitals were exempt from those restrictions.
The move will allow funding vehicles from the next tier of cities, below provincial capitals but above county level, to return to the interbank market, the sources said.
(Additional reporting by Dominic Lau in TOKYO, Aileen Wang and Jonathan Standing in BEIJING, Clement Tan in HONG KONG and Chen Yixin in SHANGHAI; Writing by Neil Fullick; Editing by Alex Richardson)