China Swaps Rise to Four-Week High on Interbank Market Opening

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China’s interest-rate swaps rose to a four-week high on speculation a move by the central bank to open up the interbank market to overseas borrowers will remove the disparity between onshore and offshore money rates.

Yuan clearing and settlement banks based abroad that are permitted to trade bonds on the interbank market will be allowed to borrow through repurchase agreements, according to a People’s Bank of China statement on its website Wednesday. The financial institutions, which include branches of the nation’s biggest lenders as well as some foreign banks, can use the funds offshore, according to the notice.

The one-year swap rate, the fixed payment to receive the floating seven-day repurchase rate, rose as much as six basis points to 2.49 percent in Shanghai. While that was the highest since May 8, it pared the gain to 2.46 percent. The overnight repo rate was at 1.03 percent, versus a comparable daily fixing in Hong Kong of 1.64 percent.

“The impact will be more via convergence of onshore and offshore spreads,” said Frances Cheung, Hong Kong-based head of rates strategy at Societe Generale SA. “In the past, we did see some ‘false’ convergences between onshore and offshore rates, but the latest effort should render any further convergence more sustainable.”

The onshore overnight repo rate has declined 272 basis points this year after the PBOC reduced interest rates and reserve-requirement ratios for banks.

Bond Market

It’s bullish for the domestic bond market as overseas institutions can get relatively cheap funding to buy more debt instruments, analysts led by Dong Dezhi at Guosen Securities Co. wrote in a research note Wednesday.

The central bank didn’t conduct open-market operations this week and hasn’t done so since April. The yield on the government’s 10-year bonds fell two basis points to 3.6 percent, according to National Interbank Funding Center Prices.

China granted a another 1 trillion yuan ($161.3 billion) quota for provincial governments to swap high-cost debt into municipal bonds, doubling the previous amount, according to people familiar with the matter.

Sheng Songcheng, head of the PBOC’s statistics department, said he believes China will remove the deposit-rate ceiling “soon,” China Business News reported, citing his comments at a seminar in late May. In the last few steps to relax controls on interest rates, the central bank started to allow lenders to sell large-denomination certificates of deposit to individuals and companies this week.

— With assistance by Helen Sun

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