China Rate Swaps Rise to Six-Month High as PBOC Curbs Leverage

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  • Banks’ cost of government funds surges to most since May
  • Investors should avoid being too bullish on bonds: economist

Is China Close to Rebalancing Its Economy?

China’s money market is showing increasing signs of a shortage of cash, with interest-rate swaps climbing to a six-month high and banks paying higher interest to obtain government funds.

The cost of one-year swaps rose as much as four basis points to 2.67 percent in Shanghai, the most expensive since April 29, while the benchmark seven-day repurchase rate held near this month’s high of 2.55 percent. Lenders paid 2.95 percent in a treasury deposit auction of three-month funds, the highest in five months.

Short-term borrowing costs have failed to come down after the week-long National Day holidays ended Oct. 7 as the central bank’s efforts to curb leverage -- including extending the tenor of lending tools -- indicated that it wants to strengthen control of interbank liquidity. Record yuan outflows and corporate tax payment requirements have added to the stress.

“It looks like the relatively tight liquidity has become a new normal,” said Deng Haiqing, chief economist at JZ Securities Co. “Investors should be cautious about being too bullish on the bond market.”

Government bonds declined on Monday, with the yield on 10-year notes climbing four basis points to 2.68 percent. The yield dropped to 2.635 percent on Friday, the lowest since Bloomberg started to compile ChinaBond data in 2006. In the futures market, five-year sovereign debt futures for delivery in December declined 0.16 percent, the most since Aug. 30, to 101.95 on Monday, while the most active 10-year contract dropped 0.27 percent.

The overnight repurchase rate, a gauge of interbank funding availability, has averaged 2.17 percent this month, little changed from September, when lenders needed to hoard cash to prepare for quarter-end regulatory checks.

The PBOC injected funds for a fourth day in open-market operations, bringing its additions in the period to 360 billion yuan ($53 billion). Financial regulators plan to tighten control on funds flowing into the property market, according to people familiar with the matter. While data last week showed economic growth met expectations, industrial output for September missed estimates. Sentiment on China has also been affected by the yuan’s drop to a six-year low, which has raised concern of capital outflows.

A net $44.7 billion worth of yuan payments left the nation last month, according to data posted on the State Administration of Foreign Exchange’s website Friday. That’s the most since the government started releasing the figures in 2010, and compares with August’s outflow of $27.7 billion.