China’s Swaps Climb as Central Bank Adds Funds at Higher Yield

China Swaps Drop From Three-Month High as PBOC Adds Record Cash
The People’s Bank of China conducted 220 billion yuan ($34.6 billion) of reverse-repurchase operations, the most in a single day, according to a trader at a primary dealer required to bid at the auctions. Photographer: Nelson Ching/Bloomberg

China’s interest-rate swaps climbed to a three-month high as the central bank boosted borrowing costs in money-market operations that injected a record 220 billion yuan ($34.6 billion) into the financial system.

The People’s Bank of China conducted 150 billion yuan of seven-day reverse-repurchase agreements at 3.4 percent, up from 3.35 percent on Aug. 16, according to a trader at a primary dealer required to bid at the auctions. It also issued 70 billion yuan of 14-day contracts at 3.6 percent. Swaps rose as the increased usage of reverse repos tempered speculation China will lower banks’ reserve requirements.

“Although the amount of reverse repos is larger, the central bank hiked the repo rate, spooking sentiment,” said Chen Qi, co-head of fixed-income research at UBS Securities Co. in Shanghai. The fund injection will push back expectations for reserve-requirement ratios to be cut, she said.

The one-year interest-rate swap, the fixed cost to receive the seven-day repurchase rate, rose eight basis points to 3.12 percent as of 4:20 p.m. in Shanghai, the highest level since May 14, data compiled by Bloomberg. The seven-day repo rate, a gauge of interbank funding availability, increased 12 basis points to 3.75 percent, a weighted average shows.

The central bank last lowered banks’ reserve requirements in May and cut benchmark interest rates in June and July to support the economy. Gross domestic product increased 7.6 percent from a year earlier in the second quarter, the least since the first quarter of 2009, official figures show. Growth will decline to a 13-year low of 8.2 percent in 2012, based on the median estimate in a Bloomberg survey.

‘Elevated Rates’

The “unusually large volume” of reverse-repo issuance “points to the central bank’s concern about the elevated level of money-market rates,” Dariusz Kowalczyk, a strategist at Credit Agricole CIB in Hong Kong, wrote in a note to clients today. “We still expect a reserve-requirement cut.”

The government may introduce new policies to boost consumers’ borrowing and spending this year, the Economic Information Daily reported today, citing an unidentified person.

The yield on the government’s 3.14 percent bonds due February 2017 climbed two basis points to 3.03 percent, according to the National Interbank Funding Center.

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