China Swaps Snap Five-Day Drop as PBOC Singals Tightening

China’s benchmark interest-rate swaps snapped a five-day decline after the central bank signaled it may absorb extra funds from the financial system.

China faces “still large” pressure for monetary and credit expansion as its trade surplus increases and capital inflows rise, the People’s Bank of China said yesterday in a statement on its website. The monetary authority won’t conduct repurchase or reverse-repurchase operations today, according to a trader at a primary dealer required to bid at the auctions.

The one-year interest-rate swap, the fixed payment to receive the floating seven-day repo rate, rose two basis points to 3.93 percent in Shanghai, according to data compiled by Bloomberg. The rate fell 10 basis points, or 0.10 percentage point, over the last five days.

“The PBOC is likely to restart its repo operation to keep liquidity at a neutral level,” said Chen Qi, a Shanghai-based strategist at UBS Securities Co. “Liquidity is quite loose at the moment. The PBOC didn’t do reverse repos today, and that is the most likely first step after yesterday’s statement.”

The central bank hasn’t sold repo contracts since June, when money-market rates surged to record highs. It started to rollover maturing three-year bonds in July to maintain funds in the financial system and last reissued 5.5 billion yuan ($902 million) of the notes on Oct. 14 at 3.5 percent.

The seven-day repurchase rate, a gauge of funding availability in the banking system, increased two basis points to 3.36 percent, according to a weighted average compiled by the National Interbank Funding Center. It touched 3.3 percent yesterday, the lowest level since July 18.

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