China Swap Rate Rises Most This Week Since June as Cash Drained

China’s interest-rate swaps rose the most since June this week as the central bank drained funds from the banking system, and on speculation the government will speed up the process of relaxing controls on borrowing costs.

The People’s Bank of China withdrew a net 47 billion yuan ($7.7 billion) this week, after injecting 17 billion yuan last week. It suspended sales of 14-day reverse-repurchase agreements yesterday after conducting the operation for two weeks. The PBOC said in a Dec. 2 statement that financial institutions in a free trade zone in Shanghai will get priority in issuing large-denomination negotiable certificates of deposit.

The one-year interest-rate swap, the fixed payment needed to receive the floating seven-day repo rate, climbed 26 basis points, or 0.26 percentage point, this week to 4.78 percent as of 10:36 a.m. in Shanghai, data compiled by Bloomberg show. That’s the biggest increase since June 21. It advanced one basis point today. The cost of the five-year swap rose to a record 4.94 percent.

“Going into next year, the central bank won’t ease monetary policy aggressively solely to boost the economy,” said Qu Qing, a Shanghai-based analyst at Shenyin Wanguo Securities Co. Money-market rates are expected to remain elevated, with the seven-day repo at 4 percent to 4.5 percent, or higher, he said.

The seven-day repo rate, a gauge of funding availability in the banking system, fell for a third week, retreating 18 basis points to 4.54 percent, a weighted average compiled by the National Interbank Funding Center shows. It dropped three basis points today.

Government Bonds

The three-month Shanghai interbank offered rate jumped 11 basis points yesterday to 4.89 percent. That was the biggest daily advance since June 20.

The yield on the 4.08 percent government bonds due August 2023 rose 15 basis points this week and one basis point today, to 4.55 percent, according to the Interbank Funding Center.

The Finance Ministry sold at least 24 billion yuan of 30-year bonds at a yield of 5.05 percent today, according to a trader at a finance company that participates in the auctions. That compares with the 4.95 percent median estimate in a Bloomberg News survey. The yield on the benchmark 30-year bond was 5.02 percent yesterday, according to ChinaBond data.

To contact Bloomberg News staff for this story: Helen Sun in Shanghai at hsun30@bloomberg.net

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

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