China Swap Rate Touches 1-Week High as Holiday Cash Demand Seen

China’s one-year interest rate swaps rose to the highest level in a week on speculation demand for cash will increase ahead of holidays this month and next.

The People’s Bank of China said yesterday it rolled over 85.1 billion yuan ($13.9 billion) of three-year notes at 3.5 percent, and that it will auction 50 billion yuan of treasury deposits on Sept. 12. The central bank added 10 billion yuan to the financial system via seven-day reverse-repurchase agreements at 3.9 percent today, according to a statement on its website. Chinese markets will be shut on Sept. 19-20 for the mid-Autumn festival and Oct. 1-7 for the National Day holidays.

“Worries that the June interbank liquidity squeeze might be repeated at end-September are overdrawn,” Uwe Parpart, Hong Kong-based chief strategist with Reorient Group Ltd., wrote in a report today. “Even with holidays and higher liquidity demand in late September, we do not expect anything like a June repeat. The PBOC has ample ammunition to prevent a squeeze.”

The cost of one-year swap contracts, the fixed payment to receive the floating seven-day repo rate, added two basis points, or 0.02 percentage point, to 4.14 percent as of 3:49 p.m. in Shanghai, the highest since Sept. 4., data compiled by Bloomberg show.

The seven-day repo rate, a gauge of funding availability in the banking system, increased seven basis points to 3.63 percent, a weighted average compiled by the National Interbank Funding Center showed. It touched 3.64 percent earlier, the highest since Sept. 3.

Chinese local administration financing vehicles’ reliance on land sales and rising property prices to repay debt creates “problems,” central bank governor Zhou Xiaochuan wrote in a commentary. Total government debt may be 15 trillion yuan to 18 trillion yuan, China Daily reported today, citing Zhou Quanhou, head of financial research at the Fiscal Science Research Center affiliated to the Ministry of Finance.

The yield on the government’s 4.08 percent bonds due August 2023 added one basis point to 4.09 percent, according to prices from the Interbank Funding Center.

— With assistance by Helen Sun

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