China Rate Swap Drops for 4th Day as PBOC Eases Squeeze

The cost of locking in China’s interest rates slid for a fourth day, the longest run of declines since February, and money-market rates fell after the central bank pledged to ease the worst cash crunch in a decade.

The People’s Bank of China has provided financing to some financial institutions to stabilize interbank lending rates and will use short-term liquidity operations and existing loan-facility tools to ensure steady markets, according to a statement posted on its website yesterday. It also called on commercial banks to improve their cash management.

The one-year interest-rate swap, the fixed cost needed to receive the floating seven-day repurchase rate, slid 16 basis points, or 0.16 percentage point, to 3.91 percent in Shanghai, data compiled by Bloomberg show. It reached an all-time high of

5.06 percent on June 20. The seven- and one-day repurchase rates, which reflect borrowing costs between banks, both fell.

“Policy makers are easing already and that’s why one-day, seven-day and other market rates have come down this week,” said Zhang Zhiming, head of China Research at HSBC Holdings Plc in Hong Kong. “They stopped taking away liquidity as a first step. If necessary, they will do reverse repos. They are not going to let interbank rates spike as they did last week.”

The overnight repurchase rate dropped 40 basis points to

5.6 percent, 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 3.14 percent this year. The seven-day rate declined 78 basis points to 7.22 percent, a separate fixing showed. It has averaged 6.84 percent in June, the highest for a month in data going back to the start of 2004.

PBOC Action

The PBOC’s statement is the first public confirmation that it is taking action to ease the cash squeeze and came hours after Ling Tao, deputy head of the central bank’s Shanghai branch, said liquidity risks were controllable. Premier Li Keqiang is seeking to wring speculative lending out of the banking system after credit expansion outpaced economic growth.

The monetary authority gauged demand for sales of 91-day bills tomorrow, according to a trader at a primary dealer required to bid at the auctions. It also asked banks to submit orders for 28-day repurchase contracts and 14-day reverse-repurchase agreements, the trader said. Demand for the securities was gauged on June 24, before bills sales were halted yesterday and no open-market operations took place.

The rate banks charge each other for three-month loans slipped six basis points to 5.58 percent, dropping for a fourth day, according to National Interbank Funding Center prices. The cost of insuring China’s sovereign debt using five-year credit-default swaps fell 11 basis points yesterday to 137 basis points in New York, retreating from a 17-month high, CMA prices show.

‘Reduced Fears’

The yield on the government’s 3.38 percent bonds due May 2023 declined four basis points today to 3.54 percent, according to the National Interbank Funding Center. The government sold 10-year Dim Sum notes at a yield of 3.16 percent in Hong Kong as part of a 13 billion yuan ($2.1 billion) issuance today.

The PBOC’s comments “have reduced fears of a panic, which were behind last week’s spike in swap rates,” said Tim Condon, head of Asian research at ING Groep NV in Singapore. “But nothing it has said or done indicates a precipitous easing of policy. They will prevent illiquidity in any single bank from causing stress for the system at large. This could mean that it takes a while for swap rates to retrace to their pre-panic levels.” The one-year swap has averaged 3.34 percent this year.

Urges Calm

The central bank told lenders to handle fluctuations in liquidity “calmly” and avoid “irrational behavior,” according to the statement. The PBOC said it will provide support to those banks with temporary funding needs if they are lending to help the economy. For banks with liquidity-management problems, the PBOC will “take corresponding measures according to circumstances” to ensure broader market stability, it said in the statement.

The monetary authority may seek to improve the nation’s debt ratio, according to a commentary by Zhang Monan, a researcher at the State Information Center, published in the China Securities Journal. The debt ratio should be prevented from rising too quickly and financial risks limited, Zhang wrote.

“Don’t expect the central bank to save you if you have done it wrong,” Chris Leung, a senior economist at DBS Bank Ltd. said in a briefing yesterday in Hong Kong. “Money is growing faster than the gross domestic product,” and not all of it contributed to real economic growth, he said.

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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