China Rate Swaps Climb as Yuan Intervention to Drain Liquidity

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China’s one-year interest-rate swaps rose for the first time in four days amid speculation central bank intervention to stabilize the currency will tighten the supply of yuan in the financial system.

The central bank bought yuan in the foreign-exchange market last week to stabilize the exchange rate after a devaluation triggered the currency’s steepest slide in two decades. Yuan positions at financial institutions in China fell by the most on record in July, a sign that capital outflows were already picking up, data showed on Friday.

“There were signs of outflows even before the currency weakened, and now with that, domestic liquidity will certainly tighten given the central bank intervention,” said Chen Long, an analyst at Bank of Dongguan Co. in Guangdong province. “Traders say big banks have become reluctant to lend in the interbank market since the yuan weakened.”

The cost of one-year swaps, the fixed payment to receive the floating seven-day repurchase rate, increased five basis points to 2.58 percent in Shanghai, data compiled by Bloomberg show. The seven-day repo rate, a gauge of interbank funding availability, climbed one basis point to 2.48 percent, after rising five basis points last week, according to a weighted average from the National Interbank Funding Center.

China’s currency devaluation last week surprised global investors and fueled concern authorities are struggling to combat a slowdown in the world’s second-largest economy. The yuan will probably move in both directions in the future following the devaluation and the PBOC could intervene to combat both appreciation and depreciation, Ma Jun, chief economist at the central bank, said Sunday in an e-mailed statement.

Sovereign bonds declined, with the yield on notes due July 2025 rising two basis points to 3.53 percent, National Interbank Funding Center prices show.

— With assistance by Helen Sun

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