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China Money Rate Gains Most This Week Since 2007 on Tightening

China’s benchmark money-market rate was poised for the biggest weekly gain since October 2007 before an increase to banks’ reserve requirements takes effect and on speculation policy makers will raise interest rates.

The amount of cash lenders must set aside as reserves will rise by 50 basis points from Dec. 20, the sixth increase this year. People’s Bank of China Governor Zhou Xiaochuan said yesterday that raising banks’ mandatory reserves doesn’t rule out higher borrowing costs, according to a report in today’s South China Morning Post.

“The market is moving on the reserve-requirement hike and talk of an interest-rate rise,” said Chris Leung, a senior economist at DBS Bank Ltd. in Hong Kong. “I don’t share the view that a reserve-requirement increase is any substitute for an interest-rate hike.” He estimates a quarter-percentage point rise in the benchmark rate before year-end.

The seven-day repurchase rate, which measures lending costs between banks, jumped 123 basis points, or 1.23 percentage points, to 3.72 percent this week, according to a daily fixing published at 11 a.m. by the National Interbank Funding Center in Shanghai.

Policy makers raised the one-year lending and deposit rates by a quarter-point on Oct. 19, the first increases since 2007. Consumer prices rose 5.1 percent in November from a year earlier, the fastest pace in 28 months, official data showed on Dec. 11.

The one year interest-rate swap, the fixed cost needed to receive the floating seven-day repo rate, slipped one basis point to 3.13 percent this week.

The yield on China’s 3.67 percent government bond due in October 2020 was unchanged at 3.83 percent and was down two basis points for the week, according to prices from the National Interbank Funding Centre.

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