China One-Year Swap Rate Rises on Capital Outflow Concerns
China’s one-year interest-rate swap rose to a three-week high on concern capital will head overseas as a slowdown in the world’s second-largest economy erodes the creditworthiness of local companies.
Yuan positions at Chinese financial institutions accumulated from sales of foreign exchange, an indication of capital inflows, rose 67 billion yuan ($10.9 billion) in May, the least in six months, the People’s Bank of China reported June 14. The nation’s rating firms cut the most bond issuer rankings on record in June, according to Guotai Junan Securities Co., the nation’s third-biggest brokerage.
“Concern about capital outflows is rising because of fear of default and increasing non-performing-loan ratios,” said Wee-Khoon Chong, a strategist at Societe Generale SA in Hong Kong.
The one-year swap contract, the fixed cost needed to receive the floating seven-day repurchase rate, climbed three basis points, or 0.03 percentage point, to 3.98 percent as of 10:23 a.m. in Shanghai, according to data compiled by Bloomberg. That is the highest since July 1. The seven-day repo increased 21 basis points to 3.97 percent, based on a weighted average compiled by the National Interbank Funding Center.
The People’s Bank of China ended a floor on borrowing costs previously set at 30 percent below benchmark lending rates, it said July 19. The limit on mortgage rates will stay to curb property speculation, the PBOC said. Also unchanged was a 10 percent limit on what banks can offer over PBOC-set deposit rates.
A total of 38 issuers were downgraded last month, according to Guotai Junan Securities Co., the most since the brokerage started compiling the data in 2005. Some 86 firms were upgraded, down from 88 a year earlier.
“The government can’t save everyone,” said Xu Hanfei, a bond analyst in Shanghai at Guotai Junan. “In the future, downgrades may spread to high-grade bonds, especially those which rely heavily on support from the central or local governments.”
Haitong Securities Co., the second-biggest listed brokerage, forecast that the first onshore default may occur in six to 12 months as the government seeks to build a sound credit system.
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