Inflation concerns have prompted swap traders to scrap bets Li Keqiang will ease monetary policy after he is appointed as the next premier at a Communist Party congress starting today.
The cost to lock in the three-month Shanghai interbank offered rate for a year rose 25 basis points in the past month to 3.76 per cent, four basis points above the benchmark floating rate after trading below it for 18 months. The yield on the June 2013 bonds of China Construction Bank Corp, the nation's second-biggest lender, climbed 15 basis points last quarter to 3.68 per cent. Globally, financial companies pay an average 2.72 per cent, according to Bank of America Merrill Lynch indexes.
The pessimism of traders in Shanghai is at odds with global banks including HSBC, which wrote this month that there is "little doubt" the country's new leaders will gear up stimulus for the world's second-biggest economy during the transition.
Li needs to balance the risks of rising bad loans with inflation forecast to reach 3.4 per cent in the third quarter of next year, up from 1.9 per cent in September, according to economists in a survey.
"Borrowing costs for companies and between banks may rise because inflation will go up and liquidity won't be as abundant," said Rainy Yuan, a Shanghai-based analyst at Masterlink Securities, a brokerage and underwriting company.
"There are a lot of uncertainties for policymakers to weigh next year. They don't want to loosen further to stir up inflation but neither should they tighten too much to hurt the economy."
The People's Bank of China has held its benchmark lending rate at 6 per cent since cutting to that level in July. The central bank has also kept the reserve ratio for the biggest banks at 20 per cent since May.
Authorities have been on pause since then as inflation has ticked up from 1.8 per cent in July, its lowest since November 2009. The US Federal Reserve's third round of so-called quantitative easing (QE3) threatens to lead to further acceleration of price rises, Yuan said.
"Inflation pressure will come back again next year as pork prices may rebound and US QE3 threatens to add imported inflation," she said.
The increase in the inflation rate comes as economists forecast economic growth will pick up this quarter to 7.7 per cent from 7.4 per cent in the three months to September 30, the weakest growth since the first quarter of 2009.
Li is currently vice-premier and a member of the Politburo Standing Committee, the highest ruling body in the party.
He will work with Premier Wen Jiabao in setting monetary policy until a March session of the legislature at which he is expected to formally take over.
The mainland's third-quarter growth may have been weaker than official data indicates, as reflected in slowing electricity production and other data, according to analysts at Standard Chartered and Capital Economics.
Li was quoted in 2007 as saying he watched data on power, rail cargo and loans because gross domestic product numbers were "man-made".
The remark was published in a leaked diplomatic cable published by WikiLeaks in late 2010.
Mainland commercial banks' delinquent obligations might rise 10 per cent this year and accelerate next year if concerns about a rebound in inflation lead authorities to tighten monetary policy, according to China Orient Asset Management Corp.
The company is one of the nation's four state-owned asset managers established in 1999 to take over trillions of yuan of bad loans from the country's largest lenders.
Total non-performing loans at the mainland's four-biggest banks increased 2.1 billion yuan (HK$2.58 billion) in the third quarter to 295.7 billion yuan, according to separate statements from the lenders last month.
"A tightening monetary policy is generally negative to credit quality of banks," said Stanley Li, an analyst at Mirae Asset Securities (HK), a unit of the South Korean brokerage.
"If the inflation rate rises to more than 5 per cent, there's likely to be an obvious tightening and this will be negative to credit quality."
As investors bet that interest rates are set to track inflation higher next year, lenders' borrowing costs have risen.
The yield premium on top-rated five-year corporate bonds over similar-maturity government debt climbed to a more than five-month high at 164 basis points on Monday.
The yield on the benchmark 10-year government note was unchanged at 3.59 per cent on Monday, according to Chinabond.