Bloomberg News

Record Cash Crunch to Ease Amid Global Slowdown: China Credit

September 25, 2011

Sept. 26 (Bloomberg) -- China’s biggest cash shortage will ease in the fourth quarter as the risk of a global economic slump prompts the central bank to halt monetary tightening, a survey of bond analysts showed.

The seven-day repurchase rate, the annualized interest rate banks say they charge each other for one-week loans, will average 3.8 percent, based on the median of 12 estimates in a Bloomberg survey. This quarter’s level of 4.4 percent is the highest in data going back to the start of 2004. Similar rates for dollars, euro and yen have averaged 0.18 percent, 1.21 percent and 0.13 percent in the same period.

“The central bank will probably stand by and watch in the fourth quarter,” said Shi Lei, head of fixed-income research in Beijing at Ping An Securities Co., a unit of the nation’s second-biggest insurance company. “With such big uncertainties in the global economy and increasing signs of a domestic slowdown, the likelihood of a hike in interest rates or reserve- requirement ratios is very low.”

Swap traders pared bets last week on the possibility the central bank will raise rates in the next 12 months as the International Monetary Fund cut economic growth forecasts for China and the world. Shi said more available cash in the banking system will spur a rebound in government bonds in the coming quarter, with five- and seven-year debt to lead gains.

The People’s Bank of China didn’t raise lenders’ reserve- requirement ratios this quarter, after nine increases in the eight months through June, and the last of five interest-rate rises in the past year took effect on July 7. The central bank began broadening the scope of reserve ratios to include margin deposits from Sept. 5, a measure being phased in over six months.

Hoarding Cash

The seven-day repo rate jumped 85 basis points, or 0.85 percentage point, last week to 4.17 percent in Shanghai, after sliding 88 basis points in the previous two weeks, on speculation lenders will hoard cash to meet quarter-end capital requirements and holiday demand for funds. China’s financial markets will be closed in the first week of October for the National Day break.

“The extra money banks have to set aside because of the widening of the reserves base may amount to more than 200 billion yuan in both October and November,” said Chen Jianheng, a bond analyst at China International Capital Corp. in Beijing. “Even though another reserve-ratio hike is unlikely in the fourth quarter, we probably won’t see a big rebound in cash supply.”

Cash Injections

M2, the broadest measure of money supply, expanded 13.5 percent from a year earlier in August, the smallest advance since October 2004, central bank data show. Growth averaged 21 percent in the past three years.

China’s central bank has kept pumping capital into the interbank market in each of the past 10 weeks, with maturing bills and repurchase agreements exceeding those issued, according to data compiled by Bloomberg. Policy makers injected 399 billion yuan ($62.4 billion) of cash in the period.

“The PBOC’s moves in open-market operations show that it may want to take banks out of the cash deadlock,” said Wang Mingfeng, a bond analyst in Beijing at Citic Securities Co., the nation’s second-biggest brokerage by revenue. “As inflation starts to trend down, monetary policy shouldn’t be so tight.”

Inflation in China slowed to 6.2 percent in August from a three-year high of 6.5 percent the previous month, the statistics bureau said on Sept. 9. Wang said consumer-price gains may moderate to about 5 percent in the fourth quarter because the slowing economy will crimp domestic demand.

Rate Expectations

China’s two-year interest-rate swaps, which exchange the central bank’s one-year deposit rate for a fixed payment, dropped seven basis points to 3.47 percent as of 9:53 a.m. in Shanghai. That’s the biggest drop in four months and the contracts, for the first time since May 2009, reflect expectations borrowing costs will be cut within a year.

The floating part of the contract is reset after one year and a rate of 3.50 percent would show traders expect no change in the official savings rate, while a 3.625 percent level would indicate one increase of 25 basis points.

China International Capital’s Chen said the country may raise interest rates one more time by the end of this year, though reserve-requirement ratios are unlikely to be increased.

Reserve ratios for smaller lenders may be lowered in November or December, according to Citic Securities’ Wang. The ratio for major banks is at a record 21.5 percent, while that for their smaller counterparts is 19.5 percent, according to data compiled by Bloomberg.

Worsening Outlook

China’s gross domestic product will rise 9.5 percent this year, less than a June estimate of 9.6 percent, the IMF said on Sept. 20, citing policy tightening and moderating external demand. The Washington-based lender lowered their 2012 growth forecast for the nation to 9 percent from 9.5 percent.

Manufacturing may shrink for a third month in September, the longest run of contractions since 2009, based on an index released by HSBC Holdings Plc and Markit Economics on Sept. 22.

The cost of insuring Chinese sovereign bonds against default is climbing. Five-year credit-default swaps on government debt jumped 47 basis points last week to 173 basis points, the biggest increase since 2008, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Falling Yields

Expectations the economy will continue to slow are helping shore up domestic demand for Chinese securities. The finance ministry sold 33.05 billion yuan of 10-year bonds on Sept. 21 at an average yield of 4.07 percent, according to Chinabond, the nation’s biggest debt clearing house. That was less than the 4.09 percent median estimate in a Bloomberg survey of analysts. The yield on similar-maturity existing notes was 3.97 percent at the end of last week.

The yield on China’s five-year bonds declined 13 basis points last week to 3.82 percent, according to Chinabond. The rate on seven-year debt dropped 11 basis points to 3.92 percent. Yields for those maturities are likely to decline by about 30 basis points in the fourth quarter, Ping An’s Shi estimated.

The yuan strengthened 0.06 percent today to 6.3848 per dollar in Shanghai, after sliding 0.09 percent last week, according to the China Foreign Exchange Trade System. Twelve- month forwards contracts gained 0.09 percent to 6.3998, a 0.2 percent discount to the spot rate. China’s currency may become fully convertible in five years, Li Daokui, an adviser to the People’s Bank of China, said Sept. 25 in Washington.

Financial institutions’ yuan positions, accumulated from purchases of foreign exchange by the central bank, rose by a net 377 billion yuan in August, 72 percent more than in July and the biggest increase in five months, central bank data showed on Sept. 21. Economists watch the numbers for signs of inflows of speculative capital.

“There will continue to be stable capital inflows into China in the fourth quarter,” said Citic Securities’ Wang, who estimated the monthly gain in yuan positions will be 250 billion to 300 billion yuan. “The short-term market sentiment won’t shake investors’ confidence in China.”

--Judy Chen. Editors: James Regan, Sandy Hendry

To contact Bloomberg News staff for this story: Judy Chen in Shanghai at xchen45@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net


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