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China Swaps Drop Most in 7 Months on Speculation Cash to Rise

China’s one-year interest-rate swap dropped the most in seven months on speculation the central bank will increase the frequency of its cash-supply operations.

The People’s Bank of China may inject funds into the banking system five days a week, compared with two currently, Market News International reported today, citing unidentified traders. The central bank didn’t respond to Bloomberg questions sent via fax seeking comment. The PBOC has issued reverse- repurchase agreements twice weekly since June, and uses the contracts to ensure funding availability.

“The rumor has eased worries about cash supply before the Lunar New Year holiday,” said Liu Junyu, a bond analyst in Shenzhen at China Merchants Bank Co., the nation’s sixth-biggest lender. “If it’s true, that would help the central bank reduce volatility in cash supply.”

The one-year swap contract, the fixed cost needed to receive the floating seven-day repurchase rate, declined 12 basis points to 3.20 percent as of 11:03 a.m. in Shanghai, the biggest drop since June, according to data compiled by Bloomberg. The rate fell 16 basis points this week.

Chinese financial markets will be shut from Feb. 11 to Feb. 15 for the holiday.

The seven-day repo rate, which measures interbank funding availability, climbed 15 basis points, or 0.15 percentage point, to 2.90 percent, according to a weighted average compiled by the National Interbank Funding Center. It increased 27 basis points from Jan. 11.

China’s economy expanded 7.9 percent in the fourth quarter from a year earlier, the government reported today. That compares with the 7.8 percent median estimate in a Bloomberg survey and 7.4 percent in the previous period. Factory output rose 10.3 percent in December, accelerating from 10.1 percent in November, separate data showed.

The yield on the 2.95 percent government bonds due August 2017 advanced three basis points to 3.26 percent, according to the Interbank Funding Center. The yield climbed two basis points this week.

--Judy Chen. Editors: Simon Harvey, Amit Prakash

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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