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China Swaps in Record Yearly Surge on Rate Liberalization Steps

China’s benchmark interest-rate swap rose the most on record this year on speculation policy steps to free up borrowing costs will drive money-market rates higher.

The one-year swap rate, the fixed payment to receive the floating seven-day repo rate, jumped 187 basis points in 2013 to 5.22 percent as of 4:31 p.m. in Shanghai, after touching all all-time high at 5.24 percent earlier. It surged 125 basis points, or 1.25 percentage point, this quarter and increased 18 basis points today.

The nation’s ruling Communist Party decided in November to accelerate interest-rate liberalization, aiming at achieving the goals by 2020. The People’s Bank of China removed a government-set floor on lending rates in July, started to publish a “loan prime rate” in October based on quotes from banks, and approved the trading of negotiable certificate of deposits this month.

“There’s no doubt the regulators will speed up the process to ease controls on interest rates next year,” said Chen Long, a bond analyst with Bank of Dongguan Co. in Guangdong province. “The PBOC will keep monetary policy moderately tight to force the economy to deleverage.”

The seven-day repurchase rate rose 82 basis points this year to 5.40 percent, according to a weighted average compiled by the National Interbank Funding Center. The gauge of funding availability in the banking system averaged 4.12 percent in 2013, up from 3.5 percent in 2012. The rate climbed 47 basis points today.

Reverse Repo

The monetary authority didn’t conduct reverse-repurchase operations today, according to two traders at primary dealers required to bid at the auctions.

The PBOC injected a net 29 billion yuan ($4.8 billion) in the five days ended Dec. 27 via seven-day reverse repurchase contracts, after the daily fixing for the seven-day repo rate soared to 8.84 percent on Dec. 23. Analysts cited a delay of fiscal fund transfers by the central government to local administrations and year-end cash demand as the reasons for tighter fund supply in the interbank market.

The seven-day repo rate will probably average 4.5 percent in the first quarter, close to a record 4.65 percent in the fourth, as the central bank will continue to deleverage the economy, according to a Bloomberg News survey of 11 analysts and traders.

The yield on benchmark 10-year government debt climbed 100 basis points this year, the biggest yearly increase since 2007, according to data compiled by Bloomberg. The rate on the 4.08 percent bonds due August 2023 rose three basis points today.

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