Benchmark may rise to most in 19 months

08:39, June 01, 2010      

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China's benchmark money-market rate may climb to a 19-month high as lenders set aside more reserves and demand for the biggest share offering in 2010 drains funds, according to Deutsche Bank AG.

Investors should pay fixed rates on three-month interest-rate swaps to gain from higher short-term borrowing costs, according to Linan Liu, a strategist at Germany's biggest bank. The seven-day repurchase rate, a gauge of banks' funding availability, may climb to 3 percent, a level last seen in October 2008, she predicted.

China's securities regulators may this week review a $30 billion stock sale by Agricultural Bank of China Ltd, according to people familiar with the plan.

"The repo rate will be more vulnerable to risks associated with swings in liquidity" caused by the stock offering, Hong Kong-based Liu wrote in a report dated May 28. "The front end should price in a higher volatility premium on the repo rate."

The People's Bank of China (PBOC) has raised its reserve-requirement ratio three times this year to help rein in lending. Including open-market operations, the higher reserves have helped the central bank soak up 1.17 trillion yuan ($171 billion) from the system in the first four months of this year, the report said.

Three-month non-deliverable swaps climbed 14 basis points to 2 percent last week, the highest level since November 2008, according to data compiled by Bloomberg.

China's non-deliverable swaps involve the exchange of fixed-rate payments with those that vary according to the repurchase rate.

Stock offering

The seven-day repurchase rate jumped 79 basis points to a three-month high of 2.6 percent last week, according to the National Interbank Funding Center.

Agricultural Bank of China Ltd, the nation's third-biggest lender by assets, may sell between 12 percent and 18 percent of its stock in the initial public offering, according to the people familiar with the matter.

"With IPO (initial public offering) funding pressure, the repo could go above 3 percent, although the central bank could inject liquidity to ease the squeeze," Liu said in an e-mail on Monday, without providing a timeframe. She recommends holding the swap bet to maturity, or until after the IPO.

The central bank paid higher yields to sell three-month bills on May 20 and May 27. Secondary-market prices show traders expect an increase of another 30 to 40 basis points in three-month yields and about 10 basis points in one-year yields, Liu said in the report.

"We think the risk-return should favor an outright paying position on the three-month swap," she wrote.

Source: China Daily


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