Bloomberg News

China Money Rate Snaps Two-Day Drop as Maturing Debt Declines

December 20, 2011

Dec. 20 (Bloomberg) -- China’s benchmark money-market rate rose, snapping a two-day decline, on speculation cash supply will tighten due to a drop in the amount of central bank bills and repurchase agreements that are maturing.

Debt redemptions will total 17 billion yuan ($2.7 billion) this week, compared with about 100 billion yuan per week on average in the past months, according to Frances Cheung, a senior strategist at Credit Agricole CIB in Hong Kong. The People’s Bank of China will probably withdraw liquidity after three weeks of net injections, she said.

“Liquidity via open-market operations is a bit tight this week,” Cheung said. Demand for cash is rising as the year-end approaches, she said.

The seven-day repurchase rate, a gauge of funding availability in the financial system, rose 12 basis points, or 0.12 percentage point, to 3.14 percent at 10:04 a.m. in Shanghai, according to a weighted average compiled by the National Interbank Funding Center.

The one-year swap rate, the fixed cost to receive the seven-day repurchase rate, was little changed at 2.71 percent, according to data compiled by Bloomberg. The rate has dropped 1.04 percentage points this quarter, the biggest three-month decline since 2008.

“The valuation of front-end interest rate swaps is at stretched levels,” Wee-Khoon Chong, a fixed-income strategist at Societe Generale SA in Hong Kong, wrote in a report today. “Heavily skewed positioning could lead to a sharp upside correction in interest swaps if the PBOC were to disappoint.”

Reserve-Ratio Cuts

Societe Generale expects the central bank to ease further by cutting banks’ reserve-requirement ratios before the end of January. There will be a total of four 50-basis point cuts in 2012, Chong forecast.

The monetary authority will lower reserve ratios for banks again in the near-term after announcing in November it would cut them for the first time in three years, according to a commentary in the China Securities Journal today.

The People’s Bank of China kept the yield on one-year bills unchanged at 3.4875 percent for a fifth week today, according to a trader at a primary dealer required to bid at the auctions. The central bank issued 26 billion yuan of the securities.

The PBOC published a list of 50 primary dealers allowed to participate in open-market operations in February, including Industrial & Commercial Bank of China Ltd., Agricultural Bank of China Ltd., Bank of China Ltd., China Construction Bank Corp., China Citic Bank Corp., Industrial Bank Co. and Postal Savings Bank of China.

--Editors: Andrew Janes, Simon Harvey

To contact Bloomberg News staff for this story: Kyoungwha Kim in Singapore at kkim19@bloomberg.net;

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


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