China Rate Swap Near Two-Week High as Inflation Gathers Pace

China’s five-year interest-rate swaps traded near a two-week high after government data showed February’s inflation was the fastest in 10 months.

China’s consumer prices climbed 3.2 percent from a year earlier, according to figures released March 9, exceeding January’s 2 percent gain and the median estimate for a 3 percent increase in a Bloomberg survey of analysts. The government set an annual inflation target of 3.5 percent at an annual congress meeting that started in Beijing on March 5.

“The higher-than-expected CPI headline number is boosting traders’ inflation expectations,” said Liu Junyu, a bond analyst in Shenzhen at China Merchants Bank Co., the nation’s sixth-biggest lender.

The five-year swap contract, the fixed cost needed to receive the floating seven-day repurchase rate, climbed one basis point to 3.70 percent as of 4:30 p.m. in Shanghai, according to data compiled by Bloomberg. It touched 3.72 percent earlier, the highest level since Feb. 25, and averaged 3.28 percent in the past 12 months.

Inflows of capital into China are swelling cash supplies and increasing inflation pressure, prompting Deutsche Bank AG and GF Securities Co. to predict the central bank will resume bill sales for the first time since December 2011 next quarter.

Repo Sales

The seven-day repurchase rate, which measures interbank funding availability, jumped 50 basis points to 2.99 percent, the biggest increase since Feb. 26, according to a weighted average compiled by the National Interbank Funding Center. It dropped 195 basis points, or 1.95 percentage points, last week.

Yuan positions at local lenders accumulated from sales of foreign exchange to the central bank, an indication of cross-border capital flows into China, rose to a record 684 billion yuan ($110 billion) in January, official data showed on March 5.

“Clearly there have been strong capital inflows from the start of this year,” said Linan Liu, a Hong Kong-based rates strategist at Deutsche Bank. “In case of accelerated inflows, the PBOC will have to take away excess liquidity through open-market operations and keep money supply growth stable close to the target.”

The People’s Bank of China gauged demand for seven and 14-day reverse-repurchase contract operations this week, according to a trader required to bid at the auctions. The central bank also asked banks to submit orders for 28-day repos.

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