China swap rate touches five-month high as controls seen looser

'A consensus has formed'

China’s one-year interest-rate swaps touched a five-month high on speculation the government will speed up the process of relaxing controls on borrowing costs.

The People’s Bank of China gauged demand from banks operating in the Shanghai free-trade zone for large-denomination negotiable certificates of deposits, 21st Century Business Herald reported today, citing an unidentified person at a financial institution in the area. The PBOC said in an “opinion” released on Dec. 2 that it will conduct such trials among qualified banks in the zone. The monetary authority reiterated this in a statement yesterday.

“A consensus has formed that this government is going to promote interest-rate liberalization, maybe at a faster pace than expected,” said Huang Hai, deputy head of the research department at SDIC CGOG Futures Co. in Beijing. “This expectation has been driving up the interest rates and bond yields since June.”

The cost of interest-rate swaps, the fixed payment needed to receive the floating seven-day repo rate, rose three basis points, or 0.03 percentage point, to 4.66 percent as of 10:34 a.m. in Shanghai, according to data compiled by Bloomberg. The rate touched 4.68 percent earlier, the highest since June 21.

The seven-day repurchase rate, a gauge of funding availability in the banking system, fell for a fourth day, dropping five basis points to 4.57 percent, according to a weighted average compiled by the National Interbank Funding Center.

The yield on the 4.08 percent government bonds due August 2023 declined one basis point to 4.45 percent, according to the Interbank Funding Center. The yield has risen 38 basis points in three months.

The PBOC asked lenders today to submit orders for 91-day bills, 28-day repo agreements, as well as 14-day reverse repos tomorrow as usual, according to a trader at a primary dealer required to bid at the auctions. The central bank injected 18 billion yuan ($2.95 billion) via reverse-repurchase agreements at 4.1 percent yesterday.

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