August 27, 2012 / 5:17 AM / 7 years ago

China's IRS rise to 3-month highs, onshore/offshore spreads widen

* Domestic market is disappointed at lack of easing steps
    * Industrial profits down in fresh sign of growth slowdown
    * Overseas market still hopeful of policy relaxation
    * Most money market rates fall as liquidity improves

    By Lu Jianxin and Pete Sweeney
    SHANGHAI, Aug 27 (Reuters) - China's interest rate swaps
rose to three-month highs on Monday, with investors disappointed
by the central bank's reluctance to take further steps to boost
the economy.
    In the latest sign of the slowdown of the world's
second-largest economy, the government announced on Monday that
China's industrial profits dropped 5.4 percent in July from a
year ago, deteriorating from June's 1.7 percent decline.
    For over a month, traders have consistently told Reuters
that the market expects the People's Bank of China (PBOC) to
take fresh easing steps to boost the economic growth in the very
near term, but the central bank has refrained from doing so.
    The PBOC did cut banks' required reserve ratios (RRR) and
official interest rates each twice so far this year, with the
latest interest rate cut occurring in early July.
    While the domestic market has increasingly felt frustrated
by the central bank's caution, overseas investors appear
confident that another RRR or rate cut may occur soon, causing
offshore IRS to fall less than their onshore counterparts,
traders said.
    "While the economy has been performing worse than expected
since April, (domestic) investors are very much disappointed at
the slowness of the PBOC's monetary easing," said a trader at a
Chinese commercial bank in Shanghai.
    "But (onshore) IRS have really risen too much in recent
several weeks, and the potential for them to rise sharply again
will be limited in the near term."
    The benchmark onshore five-year IRS rose 6.5
basis points to 3.10 percent by midday from Friday's close,
while the 10-year IRS advanced 11.67 bps to 3.25
percent. Both hit their highest levels since mid-May.
    In comparison, offshore five-year non-deliverable IRS
 rose 3 bps to 2.82 percent, while 10-years 
 also rose 3 bps to 3 percent, with their
spreads against corresponding onshore IRS hitting the widest
levels this year.
    Most China's money market rates fell on Monday as liquidity
improved after the central bank conducted large-scale reverse
bond repurchase business last week to inject a net 278 billion
yuan ($43.76 billion) short-term money into the market.
    Traders and analysts widely interpreted the PBOC move as a
substitute for an RRR cut. 
    In addition, reverse repos also enable the central bank to
provide explicit guidance on interest rates to the market via
its auction rate, traders said. 
    The benchmark seven-day repo rate dropped
16.39 bps to 3.4506 percent at midday. The 14-day repo
 edged down 1.33 bps to 3.5171 percent but the
overnight rate inched up 0.53 to 2.7023 percent.  
                                   Current  Prev close  Change
                                    (pct)                (bps)  
 7-day repo                        3.4506   3.6145      -16.39
 7-day SHIBOR                      3.4508   3.6200      -16.92
  Note: Repo rate is weighted average.
($1 = 6.3576 Chinese yuan)

 (Editing by Kim Coghill)
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