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China Swap Jumps Most Since 2011 as PBOC Fails to Ease Crunch

China Swaps Climb to 2011 High as PBOC Refrains From Adding Cash
A Chinese flag flies outside the People's Bank of China (PBOC) headquarters in Beijing. Photographer: Tomohiro Ohsumi/Bloomberg

China’s one-year interest-rate swap jumped the most since August 2011 as the central bank refrained from adding cash to the financial system amid concern housing costs are climbing too fast.

New home prices rose in 69 of the 70 cities tracked by the government in May, official data showed today, signaling the latest policy measures meant to slow demand failed. The People’s Bank of China didn’t auction repurchase contracts or reverse-repurchase agreements today, according to a statement on its website.

“The PBOC has continued to surprise with its refusal to inject liquidity through open-market operations despite extremely high money-market rates,” Dariusz Kowalczyk, a strategist in Hong Kong at Credit Agricole CIB, wrote in a report today. The housing report is “a negative for sentiment as this will make it more difficult for the government to stimulate the economy,” he said.

The one-year swap rate, the fixed cost needed to receive the floating seven-day repurchase rate, jumped 17 basis points, the most since August 2011, to 3.99 percent in Shanghai, according to data compiled by Bloomberg. It touched 4.02 percent earlier, the highest level since September 2011.

China’s central bank auctioned 2 billion yuan ($326 million) of three-month bills today at 2.91 percent, unchanged from the previous sale, according to a statement on its website.

Swap rates have risen because “the PBOC didn’t meet market expectations that it will conduct reverse-repo operations today,” said Chen Qi, a strategist at UBS Securities Co. in Shanghai. “The bill issuance shows the central bank’s firm stance that it won’t adjust the prudent monetary policy.”

Cash Shortage

A slowdown in capital inflows has contributed to cash shortages in the local money market. Fund flows have declined amid a government crackdown on hot money, an economic slowdown and speculation that the Federal Reserve will rein in policies that have boosted the supply of dollars.

Yuan positions at local financial institutions accumulated from sales of foreign exchange, an indication of capital flows into China, rose 66.86 billion yuan in May, the central bank reported on June 14. That was the smallest gain since November. Agricultural Development Bank of China Co. scaled back the size of two bond offerings today after the Finance Ministry failed last week to sell all of the debt offered at an auction for the first time in 23 months.

‘Banking Problems’

China’s worst cash crunch in at least seven years is an indicator of shadow lending gone awry and a banking crisis may appear earlier than expected if liquidity remains tight, according to Fitch Ratings.

“We are starting to see some issues emerging” in liquidity, Charlene Chu, Fitch’s head of China financial institutions, said in an interview today with Zeb Eckert on Bloomberg Television in Hong Kong. “If that doesn’t go away, some of this may be moving ahead faster and earlier than we thought. We are going to have banking sector problems. Those can manifest either in a crisis or they can manifest in slow growth.”

She earlier estimated China’s total credit, including off-balance-sheet loans, swelled to 198 percent of gross domestic product in 2012 from 125 percent four years earlier, exceeding increases in the ratio before banking crises in Japan and South Korea. In Japan, the measure surged 45 percentage points from 1985 to 1990, and in South Korea, it gained 47 percentage points from 1994 to 1998, Fitch said in July 2011.

The seven-day repurchase rate, which measures interbank funding availability, decreased seven basis points, or 0.07 percentage point, to 6.82 percent, according to a weighted average compiled by the National Interbank Funding Center.

Some 32 billion yuan of bills and repo contracts will mature this week, according to data compiled by Bloomberg.

“The tight liquidity may last at least until the middle of July,” UBS’s Chen said. “In the middle of this year, demand for cash may get stronger because commercial banks will try to meet loan-to-deposit requirements.”

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