China's Fading Stimulus Bets Push Rate Swaps to Eight-Month High

  • No interest-rate cut seen until fourth quarter, survey shows
  • Stabilizing economy, tax concern boosting swap costs: analyst

Traders in China’s interest-rate swaps market are paring bets that policy makers will add to stimulus amid signs of stabilizing growth.

The cost of one-year swaps, the fixed payment to receive the floating seven-day repurchase rate, rose as much as five basis points on Thursday, data compiled by Bloomberg show. The People’s Bank of China will keep the benchmark interest rates on hold until the fourth quarter, economists said in an April 15-20 survey. Since a similar poll in March, which signaled expectations for a 25 basis point reduction in the one-year lending rate during the second quarter, indicators from industrial output to credit growth have beaten estimates.

The demand for hedges have also received a boost from concern about a new tax. There is speculation that trading in the bonds of policy banks will be subject to a higher levy from next month, when a 6 percent value-added tax replaces a business tax of 5.5 percent.

“The market consensus now is that the central bank won’t have system-wide monetary easing in the near term,” said Wu Chunan, a bond trader at China Zheshang Bank Co. “This, along with concerns over the adoption of value-added tax on bond trading, are driving up interest-rate swap costs.”

One-year swap rose as high as 2.54 percent -- the highest intra-day level since September -- before paring the increase to 2.49 percent in Shanghai, data compiled by Bloomberg show.

The yield on China Development Bank bonds due April 2026 advanced two basis points to 3.45 percent, bringing their increase since Friday to 10 basis points, according to National Interbank Funding Center prices. Yields on 10-year sovereign bonds, whose trading is exempted from taxes, have climbed 5 basis points this week.

The PBOC cut the lending rate six times starting in November 2014, and has held it at 4.35 percent since October. It has also reduced lenders’ required reserve ratios to a five-year low of 17 percent from 20 percent early last year in five reductions. The central bank will lower that to 15.5 percent by the end of this year, according to Bloomberg’s survey.

The central bank stepped up injections via open-market operations this week, offering 260 billion yuan ($40 billion) of seven-day reverse-repurchase agreements Thursday, the most since February. Total additions in the past four days amounted to 475 billion yuan, data compiled by Bloomberg show.

The PBOC on Thursday weakened the yuan’s reference rate by 0.35 percent to 6.4803 per dollar, halting a three-day run of stronger fixings. The local currency traded in China dropped 0.07 percent to 6.4788 as of 5:09 p.m. local time, while the offshore yuan fell 0.05 percent to 6.4847.

— With assistance by Helen Sun

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