China Rate Swap Jumps, Yuan Weakens on Capital Outflow Concerns

China’s one-year interest-rate swap jumped the most in a month and the yuan fell, erasing earlier gains, as data suggested capital outflows exceeded inflows in June for the first time since November.

Yuan positions at Chinese financial institutions accumulated from sales of foreign exchange declined 41.2 billion yuan ($6.7 billion) in June, the first drop in seven months, the People’s Bank of China reported today. The State Administration of Foreign Exchange, the currency regulator, said today cross-border capital flows are expected to be “balanced” in the second half of this year.

“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 18 basis points, or 0.18 percentage point, to 4.13 percent as of 5:14 p.m. in Shanghai, according to data compiled by Bloomberg. That is the biggest increase since June 20, when money-market rates climbed to record highs amid a cash squeeze.

The seven-day repo increased 17 basis points to 3.94 percent, based on a weighted average compiled by the National Interbank Funding Center. That compares with an all-time high of 12.45 percent on June 20.

Yuan Band

The central bank 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 cap on what banks can offer over PBOC-set deposit rates.

The yuan declined 0.06 percent to 6.1413 per dollar in Shanghai, after gaining as much as 0.04 percent, according to China Foreign Exchange Trade System prices. The PBOC raised the yuan’s fixing, which limits the currency’s daily moves to 1 percent on either side, by 0.05 percent to 6.1721.

“The PBOC’s latest move is a signal that China will continue its financial reforms, possibly including a widening of the yuan’s trading band,” said Tommy Ong, executive director of treasury and markets at DBS Bank (Hong Kong) Ltd. “An acceleration in capital-account opening will help ease systemic risks in China’s financial sector.”

A total of 38 bond 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.

To contact Bloomberg News staff for this story: Judy Chen in Shanghai at xchen45@bloomberg.net; Fion Li in Hong Kong at fli59@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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