China Swaps Rise as Manufacturing Expands Fastest in 19 Months

China’s five-year interest-rate swap rose by the most in two weeks on signs growth in the world’s second-biggest economy is picking up. The yuan strengthened.

The nation’s manufacturing expanded at the fastest pace in 19 months in December, according to the final reading of a Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics issued today. The central bank may cancel open-market operations this week because China’s financial markets will be shut from Jan. 1 to Jan. 3 for the New Year’s holiday, according to a trader required to bid at the auctions.

“Growth may be good next year,” said He Weisheng, a Shanghai-based strategist at Citigroup Inc. “Domestic demand is good. Urban development projects may also spur the economy.”

The five-year swap contract, the fixed cost needed to receive the floating seven-day repurchase rate, gained four basis points to 3.67 percent as of 10:30 a.m. in Shanghai, the biggest increase since Dec. 14, according to data compiled by Bloomberg. It climbed 86 basis points this year.

The People’s Bank of China said it will stick to a prudent monetary policy next year and try to stabilize growth, rebalance the economy and contain inflation. The four-paragraph statement released late Dec. 28 after a quarterly meeting of the monetary policy committee, mostly reiterated the stance set out at a government work conference earlier this month.

Temporary Shortage

The PMI reading of manufacturing from HSBC and Markit Economics was 51.5 in December, compared with the 50.9 preliminary level and a final 50.5 in November. Fifty is the dividing line between expansion and contraction.

The seven-day repo rate, which measures interbank funding availability, rose 46 basis points to 4.58 percent today, a weighted average compiled by the National Interbank Funding Center shows. The measure dropped 102 basis points, or 1.02 percentage points, in 2012.

“The cash shortage is only temporary before the holiday,” said He. “Cash supply may rebound in the second week of January.”

The yuan strengthened 0.06 percent to 6.2282 per dollar, bringing gains this year to 1.1 percent, according to the China Foreign Exchange Trade System. The currency appreciated 4.7 percent last year and 3.6 percent in 2010. It reached 6.2223 on Nov. 27, the highest level since the country unified official and market exchange rate sin 1993.

Twelve-month non-deliverable forwards rose 0.14 percent to 6.3272 per dollar, a 1.6 percent discount to the onshore spot rate. One-month implied volatility, a measure of expected moves in exchange rates used to price options, declined four basis points to 1.80 percent.

The yield on the 2.95 percent government bonds due August 2017 dropped four basis points to 3.17 percent, according to the Interbank Funding Center.

--Judy Chen. Editors: Simon Harvey, Anil Varma

To contact Bloomberg News staff for this story: Judy Chen in Shanghai at xchen45@bloomberg.net.

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net.

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