Swaps Signal Further Rate Increases Adding to Yuan Pressure: China Credit
By - Apr 6, 2011 12:01 AM GMT+0700
The cost of fixing borrowing costs in China suggests policy makers will raise interest rates at least once more this year as food and fuel costs surge, adding pressure on the yuan to strengthen.
The five-year non-deliverable swap rate jumped 22 basis points in the past two weeks to 4.18 percent, after a report showed a higher-than-forecast inflation rate of 4.9 percent in February. The central bank’s latest increase was announced yesterday before an April 15 report that will probably show consumer prices climbed 5.2 percent in March, according to the median estimate in a Bloomberg News survey of nine economists.
Brazil, Poland, India, South Korea and Thailand all raised benchmark borrowing costs in the past month, increasing the allure of local currency-denominated assets as interest rates in the U.S. and Europe remain near zero. China’s benchmark lending rate of 6.31 percent compares with 11.75 percent in Brazil, 8 percent in Russia and 6.75 percent for India.
“This move suggests the March inflation figure could be higher than market expectations,” said Liu Li-Gang, an economist at Australia & New Zealand Banking Group in Hong Kong. “Another two hikes will be possible in the second quarter and one in the third. Given China is still facing a strong pass- through of imported inflation, the yuan will be allowed fast appreciation.”
The People’s Bank of China boosted its benchmark one-year lending rate yesterday by a quarter point to 6.31 percent, making its announcement at the end of a holiday that ends today. The one-year deposit rate rose to 3.25 percent from 3 percent.
Two-year swaps tied to the one-year deposit rate were at 3.35 percent before the rate rise was announced, showing expectations for 70 basis points, or 0.70 percentage point, of increases in the coming year, according to data compiled by Bloomberg. Buyers of the contracts receive the deposit rate for one year, after which the floating payment is reset for the second year.
The yuan gained 4.3 percent in the past year and touched 6.5452 per dollar on April 1, the strongest level since 1993 before it closed for the holiday. Twelve-month non-deliverable forwards were little changed at 6.4155 in Hong Kong, which is also closed, showing traders are pricing in a 2.1 percent appreciation.
Mizuho Securities Asia Ltd., Citigroup Inc., and UBS AG predicted the nation’s fourth increase in six months before the end of April. All 20 economists in a Bloomberg survey forecast a move by the end of the second quarter. In New York trading yesterday, Sina Corp. and Baidu Inc., among the biggest Internet companies in China, led declines for U.S.-traded China shares.
“With China being a step ahead, it should be positive for equities,” said Jerome Gonzalez, Manila-based fund manager at Philequity Management Inc., who helps manage about $90 million. “China’s central bank has led the way through the recovery. They were the ones who first loosened up their monetary policies during the crisis. They were again a step ahead when their economy started picking up.”
Five-year credit-default swaps on China’s sovereign bonds have fallen about 5 basis points in the past month to 70. Credit-default swaps insure debt against non-payment, and traders use them to speculate on credit quality. An increase suggests deteriorating perceptions of creditworthiness and a drop shows improvement. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
China’s inflation has been driven mainly by food prices, which rose at an 11 percent annual pace in February. In addition, Premier Wen Jiabao’s efforts to boost incomes and consumer spending mean the government is targeting an increase in minimum wages of 13 percent a year through 2015.
“We are still expecting one more rate hike after this,” Mirza Baig, a Singapore-based currency strategist at Deutsche Bank AG, Germany’s largest bank. “Asian central banks will continue to hike interest rates given what’s going on in the global commodities markets.”
Inflation may stay above 5 percent for the rest of the first half, said Wang Tao, a Beijing-based economist for UBS AG. She predicts a rate increase in June and another is possible in the third quarter. The economy will grow 9.3 percent this year, she said, faster than the World Bank’s 9 percent forecast.
While China’s economy “isn’t overheating,” policy makers still need to raise interest rates and let the currency appreciate, said Nalin Chutchotitham, a Bangkok-based analyst at Kasikornbank Pcl, Thailand’s third-largest lender.
“If you look at numbers in China, from bank loans to fixed-asset investment to property prices, they are all slowing down a little bit,” she said. “We can still expect China to keep raising their interest rates and, based on economic fundamentals, the yuan is still going to appreciate.”
To contact the reporter on this story: David Yong in Singapore at dyong@bloomberg.net; Yumi Teso in Bangkok at yteso1@bloomberg.net
To contact the editor responsible for this story: Sandy Hendry at at shendry@bloomberg.net.
The five-year non-deliverable swap rate jumped 22 basis points in the past two weeks to 4.18 percent, after a report showed a higher-than-forecast inflation rate of 4.9 percent in February. The central bank’s latest increase was announced yesterday before an April 15 report that will probably show consumer prices climbed 5.2 percent in March, according to the median estimate in a Bloomberg News survey of nine economists.
Brazil, Poland, India, South Korea and Thailand all raised benchmark borrowing costs in the past month, increasing the allure of local currency-denominated assets as interest rates in the U.S. and Europe remain near zero. China’s benchmark lending rate of 6.31 percent compares with 11.75 percent in Brazil, 8 percent in Russia and 6.75 percent for India.
“This move suggests the March inflation figure could be higher than market expectations,” said Liu Li-Gang, an economist at Australia & New Zealand Banking Group in Hong Kong. “Another two hikes will be possible in the second quarter and one in the third. Given China is still facing a strong pass- through of imported inflation, the yuan will be allowed fast appreciation.”
The People’s Bank of China boosted its benchmark one-year lending rate yesterday by a quarter point to 6.31 percent, making its announcement at the end of a holiday that ends today. The one-year deposit rate rose to 3.25 percent from 3 percent.
Two-year swaps tied to the one-year deposit rate were at 3.35 percent before the rate rise was announced, showing expectations for 70 basis points, or 0.70 percentage point, of increases in the coming year, according to data compiled by Bloomberg. Buyers of the contracts receive the deposit rate for one year, after which the floating payment is reset for the second year.
Government Bonds
The yield on three-year government bonds in Shanghai climbed 5 basis points to 3.25 percent in the first quarter and closed on April 1 at 3.26 percent. The rate compares with 6.59 percent for similar-maturity debt in Russia, 7.84 percent for India and 12.91 percent for Brazil.The yuan gained 4.3 percent in the past year and touched 6.5452 per dollar on April 1, the strongest level since 1993 before it closed for the holiday. Twelve-month non-deliverable forwards were little changed at 6.4155 in Hong Kong, which is also closed, showing traders are pricing in a 2.1 percent appreciation.
‘Going Is Good’
“The basic implication is probably that Asian currencies are more attractive,” said Kieran Curtis, who helps manage about $2 billion in emerging-market debt in London at Aviva Investors, a unit of the U.K.’s second-largest insurer. “China tends to tighten when the going is good. So, Chinese tightening is often coincident with strong global stock markets.”Mizuho Securities Asia Ltd., Citigroup Inc., and UBS AG predicted the nation’s fourth increase in six months before the end of April. All 20 economists in a Bloomberg survey forecast a move by the end of the second quarter. In New York trading yesterday, Sina Corp. and Baidu Inc., among the biggest Internet companies in China, led declines for U.S.-traded China shares.
“With China being a step ahead, it should be positive for equities,” said Jerome Gonzalez, Manila-based fund manager at Philequity Management Inc., who helps manage about $90 million. “China’s central bank has led the way through the recovery. They were the ones who first loosened up their monetary policies during the crisis. They were again a step ahead when their economy started picking up.”
‘Comfortable’
Central bank Deputy Governor Yi Gang said March 23 that rates were at a “comfortable” level and that he was “not too worried” by price increases. Inflation may drop “sharply” in the second half on moderating economic growth, smaller increases in food costs and favorable year-earlier bases for comparison, said Mark Williams, an economist at Capital Economics Ltd. in London.Five-year credit-default swaps on China’s sovereign bonds have fallen about 5 basis points in the past month to 70. Credit-default swaps insure debt against non-payment, and traders use them to speculate on credit quality. An increase suggests deteriorating perceptions of creditworthiness and a drop shows improvement. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
China’s inflation has been driven mainly by food prices, which rose at an 11 percent annual pace in February. In addition, Premier Wen Jiabao’s efforts to boost incomes and consumer spending mean the government is targeting an increase in minimum wages of 13 percent a year through 2015.
Pork, Copper
Pork prices in China surged 40 percent since late May to a 30-month high, reflecting rising consumption of the meat. Oil has climbed 31 percent in the past six months as unrest in the Middle East and North Africa disrupted supply. Copper prices jumped 15 percent in London as traders anticipated a recovery in the global economy.“We are still expecting one more rate hike after this,” Mirza Baig, a Singapore-based currency strategist at Deutsche Bank AG, Germany’s largest bank. “Asian central banks will continue to hike interest rates given what’s going on in the global commodities markets.”
Inflation may stay above 5 percent for the rest of the first half, said Wang Tao, a Beijing-based economist for UBS AG. She predicts a rate increase in June and another is possible in the third quarter. The economy will grow 9.3 percent this year, she said, faster than the World Bank’s 9 percent forecast.
While China’s economy “isn’t overheating,” policy makers still need to raise interest rates and let the currency appreciate, said Nalin Chutchotitham, a Bangkok-based analyst at Kasikornbank Pcl, Thailand’s third-largest lender.
“If you look at numbers in China, from bank loans to fixed-asset investment to property prices, they are all slowing down a little bit,” she said. “We can still expect China to keep raising their interest rates and, based on economic fundamentals, the yuan is still going to appreciate.”
To contact the reporter on this story: David Yong in Singapore at dyong@bloomberg.net; Yumi Teso in Bangkok at yteso1@bloomberg.net
To contact the editor responsible for this story: Sandy Hendry at at shendry@bloomberg.net.
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