A wave of pessimism rises in China

China’s interest-rate traders are the most pessimistic on economic growth in 21 months, as Fitch Ratings says policy makers are focused on fixing the nation’s banks to avert an industry crisis.

The five-year interest-rate swap, which exchanges fixed payments for the floating seven-day repurchase rate, was 32 basis points below the one-year rate as of 11:26 a.m. in Shanghai, the biggest discount since September 2011, data compiled by Bloomberg show. The shorter contract jumped 22 basis points today to 4.2 percent after the finance ministry’s 10-year bond sale drew the lowest bid-to-cover ratio since August 2012.

“The PBOC is doing the opposite of what the banks were hoping it would do,” said Ju Wang, a senior strategist at HSBC Holdings Plc in Hong Kong. “It is focusing on cleaning up the banks’ balance sheets and the financial system in spite of the liquidity squeeze.”

An inverted swap curve is a further sign of waning confidence about the prospects for the world’s second-largest economy, after Goldman Sachs Group Inc., Morgan Stanley and UBS AG cut their 2013 growth forecasts. A report yesterday showed property prices are defying government lending curbs and Fitch said the cash shortage reflects a crackdown on shadow banking that will slow expansion.

“We are going to have banking sector problems,” Charlene Chu, Fitch’s head of China financial institutions, said in a Bloomberg Television interview in Hong Kong yesterday. “Those can manifest either in a crisis or they can manifest in slow growth.”

(Bloomberg)