Bloomberg News

China Swaps Decline as Cash Shortage May Spur Reserve-Ratio Cut

February 02, 2012

Feb. 2 (Bloomberg) -- China’s interest-rate swaps fell for the first time this week on speculation a cash shortage will persuade policy makers to cut banks’ reserve-requirement ratios.

The one-year rate reached the highest level in almost three months yesterday as maturing reverse-repurchase contracts reduced the supply of funds. The People’s Bank of China added 353 billion yuan ($56 billion) via 14-day reverse-repo operations before the week-long Lunar New Year holiday that started on Jan. 23. That was the biggest injection since Bloomberg began collecting the data in early 2008.

“I still expect China to do something and cut reserve ratios this month,” said Frances Cheung, a Hong Kong-based strategist at Credit Agricole CIB. “I think liquidity is still going to be tight, if there is no liquidity injection.”

The one-year swap rate, the fixed cost to receive the seven-day repo rate, decreased two basis points, 0.02 percentage point, to 3.24 percent in Shanghai, according to data compiled by Bloomberg. It touched 3.35 percent yesterday, the highest level since Nov. 3.

The monetary authority suspended a sale of three-month bills for a sixth week today as it pulled a net 351 billion yuan out of system after reverse repo contracts expired, ending four weeks of injections.

‘Visible Drop’

The seven-day repurchase rate, a gauge of funding availability in the financial system, fell two basis points to 4.33 percent, according to a weighted average compiled by the National Interbank Funding Center.

“We expect a more visible drop in the fixing today, following the pattern of easier liquidity conditions in the first half of every month in China,” Ju Wang, a Barclays Capital strategist in Singapore, wrote in a report today, referring to the 7-day repo fixing. The market is “waiting for more clarity on possible reserve-ratio cuts.”

China’s economy is headed for a “hard landing” this year as weaker demand overseas chokes off exports, said Gary Shilling, who correctly forecast the U.S. recession that began in December 2007. A Chinese government report yesterday showed that export orders fell last month, even as manufacturing expanded.

Government bonds rose. The yield on securities due August, 2021 fell one basis point to 3.433 percent, snapping a three-day advance.

--Editors: Andrew Janes, Anil Varma

To contact the reporter on 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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