China Swaps Decline as Rate Cuts Succeed Where Injections Failed

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China’s money-market rates declined as the central bank’s fifth interest-rate cut in nine months showed signs of success in bringing down borrowing costs after recent cash injections failed to do so.

Liquidity had tightened with the authority buying yuan in the past two weeks to steady the exchange rate following a shock devaluation to the currency. The People’s Bank of China tried to ease financing costs and help arrest an equities slide by pumping a net 150 billion yuan ($23.4 billion) into the financial system last week in the biggest open-market additions since February, and a further 30 billion this Tuesday. The one-day repurchase rate climbed through both injections.

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repurchase rate, fell 12 basis points to 2.42 percent as of 5:10 p.m. in Shanghai, data compiled by Bloomberg show. The overnight repo rate, a gauge of interbank liquidity, dropped 13 basis points to 1.73 percent, breaking a 39-day record run of increases.

“The cuts will alleviate market concerns over tightening liquidity,” said Xu Hanfei, chief fixed-income analyst at Guotai Junan Securities Co. in Shanghai. “Short-term funding costs will be capped.”

The central bank reduced its one-year lending and deposit rates by 25 basis points each to 4.6 percent and 1.75 percent, respectively. It lowered the reserve-requirement ratio by 50 basis points for all lenders, effective Sept. 6. It also added funds to the financial system by offering 140 billion yuan of six-day loans at a 2.3 percent rate through its Short-term Liquidity Operations facility.

Yuan, Bonds

The yuan weakened as much as 0.26 percent before closing little changed at 6.4105 a dollar in Shanghai, according to China Foreign-Exchange Trade System prices. The offshore yuan traded freely in Hong Kong was also steady at 6.4868. The PBOC cut its reference rate to a four-year low of 6.4043 after a gauge of dollar strength rose the most since July overnight.

The yield on sovereign bonds due July 2025 retreated four basis points to 3.44 percent, the lowest since the notes were issued last month, data from the National Interbank Funding Center show. The seven-day repo rate dropped 18 basis points, the most since July 6, to 2.37 percent.

China devalued the yuan on Aug. 11 and shifted to a more market-oriented exchange rate, triggering the currency’s steepest slide in two decades. Under the new system, PBOC intervention has partly replaced the daily reference rate’s role in guiding currency moves.

Downward Pressure

“There’s pressure on the renminbi to depreciate,” said Khoon Goh, a senior foreign-exchange strategist at Australia & New Zealand Banking Group Ltd. in Singapore. “China is still intervening to stem the extent of the yuan’s depreciation. They are trying to boost the economy with the interest-rate and reserve-ratio cuts, but I think it’s probably not sufficient. The currency also has to make more adjustments.”

The Shanghai Composite Index of stocks fell 1.3 percent, after tumbling 7.6 percent on Tuesday. The reserve-ratio cut will release 750 billion yuan into the financial system, according to an estimate by Barclays Plc.

The Ministry of Finance auctioned three-year bonds at 2.86 percent Wednesday, according to a statement on the China Central Depository & Clearing Co. website. That compares with the median estimate of 2.87 percent in a Bloomberg survey.

There is no basis for yuan devaluation to persist and the nation can maintain the exchange rate at a reasonable and equilibrium level, Premier Li Keqiang said during a meeting with Kazakhstan First Deputy Prime Minister Bakytzhan Sagintayev, according to a statement posted on the State Council website Tuesday.

“The double cut confirms that, between stable currency and independent monetary policy, China chooses the latter,” Tommy Xie, a Singapore-based economist at Oversea-Chinese Banking Corp., wrote in a note. “We see a good chance that the yuan may weaken further in both onshore and offshore markets as a knee-jerk reaction to China’s jumbo easing.”

— With assistance by Helen Sun, and Fion Li

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