China’s one-year interest-rate swaps climbed to the highest level since July 2008 as faster-than- forecast economic growth fueled speculation the central bank will raise borrowing costs in coming weeks. The contracts, which exchange the seven-day repurchase rate for fixed payments, gained 10 basis points to 3.64 percent as of 12:19 p.m. in Shanghai, according to data compiled by Bloomberg. The repo rate, a gauge of cash availability in the interbank market, almost tripled this week. The swaps market reflected bets for the benchmark one-year deposit rate to be raised by about a percentage point from 2.75 percent in 2011. Deutsche Bank AG, JPMorgan Chase & Co. and UBS AG boosted 2011 economic growth and inflation forecasts for China yesterday, saying interest rates may be raised this quarter. Mizuho Securities Asia Ltd. and Action Economics said an increase may be announced before the week-long Chinese New Year holiday starts Feb. 2. Brazil lifted borrowing costs two days ago and economists predict India will follow suit next week. “The numbers show that inflation remained high and the economy was still at the verge of overheating, entailing a continuation of policy tightening,” said Liao Qun, a Hong Kong- based economist at Citic Bank International Ltd., a unit of the state-owned investment company. “The next move is anticipated to be an interest-rate hike around Feb. 10,” when economic data for January will start to be released, he said. Growth, Inflation Gross domestic product rose 9.8 percent from a year earlier in the three months through December, accelerating from a 9.6 percent pace the previous quarter, the statistics bureau reported yesterday. The median forecast of economists surveyed by Bloomberg was for growth of 9.4 percent. Inflation eased to 4.6 percent in December from a two-year high of 5.1 percent. Deutsche Bank boosted its 2011 economic growth forecast to 9.2 percent from 8.7 percent, and its projection for average increases in consumer prices to 5 percent from 4.4 percent. JPMorgan’s estimates were revised to 9.6 percent and 4.6 percent, while UBS’s rose to 9.6 percent and 4.8 percent. “We see a growing likelihood of more aggressive policy responses,” Ma Jun, chief China economist at Deutsche Bank AG in Hong Kong, said yesterday. “We do not rule out the possibility of another rate hike in the coming weeks.” UBS economist Wang Tao said yesterday borrowing costs may be raised in February, while her counterparts at JPMorgan, Commerzbank AG, Nomura Holdings Inc. and Societe Generale SA all forecast increases for this quarter. The central bank may raise rates around the New Year holiday if the inflation situation stays “not optimistic,” the China Securities Journal said in a front-page editorial today. The weeklong break commences Feb. 2. Swaps, Repo Rate Two-year swaps tied to the central bank’s one-year deposit rate were little changed at 3.28 percent, according to data compiled by Bloomberg. The rate reached 3.44 percent on Nov. 26, the highest level since October 2008. Buyers of the contracts receive the deposit rate for one year, after which the floating payment is reset for the second year. The seven-day repurchase rate surged 4.74 percentage points in the past five days, the biggest weekly jump since October 2007. The rate climbed 1.27 percentage points to 7.3 percent today, according to the National Interbank Funding Center’s daily fixing in Shanghai. The yield on benchmark 10-year bonds climbed three basis points to 4 percent yesterday, the highest level since November. A basis point is 0.01 percentage point. Cash Crunch “Swaps will continue rising as money availability can only become tighter as the central bank seeks to drain liquidity by lifting banks’ reserve requirements to curb lending,” said Ye Yuzhang, an interest-rate trader at Industrial Bank Co. in Shanghai. The People’s Bank of China raised its one-year deposit rate twice in the last quarter, lifting it by half a percentage point. This month it ordered major banks to set aside more funds as reserves for the fourth time since October, helping limit credit expansion as policy makers tackle inflation. The Reserve Bank of India will increase its repurchase rate by a quarter-point to 6.5 percent on Jan. 25, according to all 14 economists surveyed by Bloomberg News. Brazil’s monetary authority raised the benchmark Selic rate by 50 basis points to 11.25 percent on Jan. 19. Premier Wen Jiabao pledged this week to prevent “abnormal” loan growth and said the government will “ensure overall price levels are basically stable” in the first quarter. Multiple monetary policy tools will be used to achieve this, he added. ‘Hawkish’ Officials China faces relatively large inflation pressures this year and can’t be “relaxed” about rising prices, Ma Jiantang, head of the National Bureau of Statistics said yesterday in Beijing. Higher global commodity prices, domestic liquidity and wage increases may push up prices, he said. “All Chinese officials are quite hawkish, acknowledging inflation concerns,” said Wee-Khoon Chong, a fixed-income strategist at Societe Generale in Hong Kong. He predicts benchmark rates will be raised by 50 basis points this quarter, 25 in the second and 25 in the final six months of 2011. Higher rates may spur capital inflows, adding to pressure for the yuan to appreciate. The currency slid 0.03 percent to 6.5873 per dollar today, holding near a 17-year high of 6.5817 reached Jan. 19. Twelve-month non-deliverable forwards rose 0.12 percent to 6.4704, reflecting bets for a 1.8 percent gain. Five-year contracts to protect against non-payment of China’s debt rose 3.5 basis points yesterday to 79.2 basis points, according to CMA prices in New York. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government fail to adhere to debt agreements. --Belinda Cao, Sonja Cheung. With assistance from Sophie Leung and Susan Li in Hong Kong. Editors: James Regan, Sandy Hendry To contact Bloomberg News staff for this story: Belinda Cao in Beijing at +86-10-6649-7570 or lcao4@bloomberg.net To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net

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