China Rate Swap Declines for Third Day as PBOC Halts Bill Sales

The cost of locking in China’s interest rates fell for a third day, the longest run of declines in a month, as the central bank refrained from selling bills amid the worst cash crunch in at least a decade.

The People’s Bank of China sold three-month bills on May 9 for the first time since 2011 and has held twice-weekly auctions of the securities in all but one of the last six weeks. It won’t sell bills or conduct open-market operations today, according to traders at primary dealers required to bid at the auctions. The nation’s liquidity risk is controllable and money-market rates will be kept at a “reasonable” level, PBOC official Ling Tao said today in Shanghai.

“The previous high rates were not sustainable as the central bank won’t let the system fail,” said Ju Wang, a strategist at HSBC Holdings Plc in Hong Kong. “But the downside is also limited as banks still continue to struggle. The improvement will only be gradual.”

The one-year interest-rate swap, the fixed cost needed to receive the floating seven-day repurchase rate, slid 17 basis points, or 0.17 percentage point, to 4.10 percent in Shanghai, data compiled by Bloomberg show. It reached an all-time high of 5.06 percent on June 20.

The rates banks charge one another for loans surged to record highs last week and subsequently declined as policy makers injected funds to selected lenders. Transactions were recorded at levels below prevailing market rates for one- and seven-day repos in the final hour of trading on June 20 and 21, according to data compiled by Bloomberg.

Crisis Risk

The overnight repurchase rate dropped 47 basis points to 6 percent in Shanghai, according to a daily fixing compiled by the National Interbank Funding Center. It reached a record 12.85 percent on June 20 and has averaged 3.12 percent this year. The seven-day rate rose 68 basis points today to 8 percent, following a decline of 345 basis points in the past two days, a separate fixing showed.

Ling, deputy director, of the PBOC’s Shanghai branch, said liquidity risks are controllable and the central bank will closely monitor money-market rates. Policy makers shouldn’t ignore the possibility of a crisis arising from the recent cash squeeze, according to a commentary posted on China Securities Journal’s front page today. At least five companies canceled or delayed scheduled bond sales totaling some 32.1 billion yuan ($5.2 billion), according to statements posted online yesterday.

“The liquidity drought has already hit the economy,” said Shao Jiamin, the Shanghai-based head of fixed income at HFT Investment Management, which oversaw some 28 billion yuan as of March 31. “The situation is going to last for a while as the inaction of the PBOC in terms of open-market operations will go on for a while. The central bank is determined to improve or even eliminate companies with unhealthy balance sheets or cash flows.”


The cost of insuring China’s sovereign debt using five-year credit-default swaps jumped 20 basis points yesterday in New York to a 17-month high of 147 basis points, CMA prices show. The yield on the government’s 2.62 percent bonds due April 2014 slid 10 basis points today to 3.85 percent, according to the National Interbank Funding Center.

The central bank said in a statement on June 23, after the monetary policy committee’s second-quarter meeting in Beijing, the nation should “appropriately fine-tune” its policies. There is a reasonable amount of liquidity in the financial system and banks should control risks from credit expansion, including those associated with maturity mismatch, the monetary authority said in a June 17 statement posted yesterday on its website.

Discipline Banks

“The message is that the credit crunch is going to persist, that the PBOC is not going to precipitously ease,” said Tim Condon, head of Asian research at ING Groep NV in Singapore. “This message is consistent with the view that the PBOC engineered the crunch to discipline banks. We could see more spikes as banks have to roll over maturing obligations.”

Chinese regulators are forcing trust funds and wealth managers to shift assets into publicly traded securities as they seek to curb lending that doesn’t involve local banks, so-called shadow banking, according to Fitch Ratings. More than 1.5 trillion yuan of wealth management products will mature in the last 10 days of June and mid-tier banks, with an average of 20 percent to 30 percent of deposits in such products, face the most difficulty, the ratings company said on June 21.

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