China Swap Rate Drops to One-Month Low on Loosening Speculation

China’s one-year interest-rate swap fell to the lowest level in more than a month on speculation the central bank will seek to bring down funding costs to stem slowing economic growth and curb the risk of defaults.

The cost of one-year swaps, the fixed payment for receiving the floating seven-day repurchase rate, fell five basis points, or 0.05 percentage point, to 4.78 percent as of 10:31 a.m. in Shanghai, according to data compiled by Bloomberg. The rate touched 4.765 earlier, the least since Dec. 16, after retreating 32 basis points last week.

The People’s Bank of China added a net 375 billion yuan ($62 billion) into the banking system last week, the most since the period before the Lunar New Year last February, when it pumped in 662 billion yuan, data compiled by Bloomberg show. Financial markets in China will be shut from Jan. 31 through Feb. 6 for the holidays. The injection came as a preliminary reading of the Purchasing Managers’ Index indicated manufacturing shrank the first time in six months in January, and a 30 billion-yuan trust product edged toward the brink of default, the first of its kind in at least a decade.

“As the economy looks to be slowing down, interest rates are leading to financial difficulties for companies,” Xue Hexiang and Wang Jin, Shanghai-based analysts at Guotai Junan Securities Co., wrote in a note. “The injection should just be a prelude for loosening. It’s not just tactical.”

The yield on government bonds due August 2023 fell one basis point to 4.49 percent, according to the Interbank Funding Center. That was the lowest level since Dec. 4.

The PBOC today asked lenders submit orders for 14- and 21-day reverse-repurchase agreements, as well as 28-day repo contracts and 91-day bills for this week, according to a trader at a primary dealer required to bid at the auctions.

The seven-day repurchase rate, a gauge of interbank funding availability, dropped 19 basis points to 4.65 percent, according to a weighted average by the National Interbank Funding Center.

To contact Bloomberg News staff for this story: Helen Sun in Shanghai at hsun30@bloomberg.net

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

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