China Swaps Gain Most in Five Years on Prolonged Cash Squeeze

China’s one-year interest-rate swap rose by the most in five years as the central bank refrained from adding funds to the financial system to ease a cash squeeze, causing demand to fall at a government debt auction.

The finance ministry’s sale of 30 billion yuan ($4.9 billion) of 10-year bonds today drew bids for 1.43 times the amount on offer, the least since August 2012. The People’s Bank of China asked lenders to submit orders for 14-day reverse-repurchase agreements and 28-day repurchase contracts this morning, according to a trader at a primary dealer required to bid at the auctions. The PBOC has refrained from using reverse repos, which inject funds, since Feb. 7.

“The cash shortage may get even worse before the quarter-end because banks will have to hoard cash to meet loan-to-deposit ratio requirements,” said Chen Qi, a strategist at UBS Securities Co. in Shanghai. “The central bank probably won’t come out to intervene unless there is a sharp decline in economic growth and large capital outflows.”

China’s one-year swap, the fixed cost needed to receive the floating seven-day repo rate, jumped 37 basis points to 4.35 percent in Shanghai, according to data compiled by Bloomberg. That was the biggest increase since June 2008. The rate touched 4.39 percent, the highest level since September 2011.

‘Out of Control’

The seven-day repurchase rate, which measures interbank funding availability, rose 144 basis points, or 1.44 percentage points, to 8.26 percent, a weighted average compiled by the National Interbank Funding Center shows. That was the highest since June 2011.

Trading in the interbank money market was extended by 30 minutes to 5 p.m. in Shanghai, according to a spokeswoman at the National Interbank Funding Centre.

The PBOC is expected to step in the market “soon to at least stabilize the condition before it gets out of control,” Wee-Khoon Chong, a strategist at Societe Generale SA in Hong Kong, wrote in a report today.

The finance ministry sold 10-year notes at a yield of 3.50 percent, according to a trader at a finance company that participates in the auctions. That compares with the median estimate of 3.47 percent in a Bloomberg News survey and 3.38 percent at the previous sale on May 22.

Yuan positions at local financial institutions accumulated from sales of foreign exchange, an indication of capital inflows, rose 66.86 billion yuan in May, the central bank reported June 14, the smallest increase since November.

Market ‘Disappointed’

Monetary loosening would lead to more fund outflows and affect the foreign-exchange market, the Financial News reported today, citing an unidentified person. The PBOC also gauged demand for 91-day bills tomorrow, according to the trader.

Chinese regulators are forcing trust funds and wealth managers to shift assets into publicly traded securities as it seeks to curb lending that doesn’t involve local banks, known as shadow banking.

“The market is disappointed by the lack of reverse repos from the PBOC,” said Frances Cheung, a strategist at Credit Agricole CIB in Hong Kong. “The liquidity squeeze stems from less inflows and policy makers’ own policy to crack down on shadow banking, so the PBOC may be reluctant to use short-term tools to help.”

Fitch Ratings said in a statement yesterday that the cash shortage reflects the move to reduce shadow banking, a measure that will ultimately slow economic growth.

New home prices rose in 69 of the 70 Chinese cities tracked by the government in May, defying lending curbs, an official report showed yesterday. China may expand property tax trials to more cities “soon,” the China Securities Journal reported today, citing unidentified people. Beijing, Shenzhen, Nanjing, Hangzhou and Qingdao have drafted property tax trial plans, the report said.

The yield on 3.38 percent government bonds due May 2023 rose one basis point to 3.51 percent today, according to the China National Interbank Funding Center.

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