China Rate Swap Slides to One-Year Low on Targeted Easing Bet

China’s benchmark interest-rate fell to the lowest level in a year after the government said it will loosen reserve requirements for some banks.

The State Council has decided to “appropriately” lower reserve-requirement ratios for banks that have extended a certain amount of loans to rural borrowers and small companies, it said May 30 after a meeting led by Premier Li Keqiang. The People’s Bank of China will set up a re-lending facility for smaller companies and has set this year’s quota at 50 billion yuan ($8 billion), state broadcaster China Central Television reported May 31.

The cost of one-year swaps, the fixed payment needed to receive the floating seven-day repurchase rate, fell nine basis points, or 0.09 percentage point, from May 30 to 3.38 percent as of 4:44 p.m. in Shanghai, data compiled by Bloomberg show. It earlier sank to 3.33 percent, the lowest level since June 3, 2013. Financial markets were shut yesterday for a holiday.

“The policy makers are expected to continue targeted easing to make sure those sectors which the government wants to lend support can get the money timely,” said Wang Qiangsong, a fixed-income analyst at Bank of Nanjing Co. in Jiangsu province. “The central bank may resume 14-day repos on Thursday or next week to increase the amount of repo contracts maturing later this month to prevent any quarter-end tightness.”

Steering China's Interest Rates

The People’s Bank of China sold 30 billion yuan of 28-day repurchase agreements at 4 percent today, according to a statement on the website. That compares with 60 billion yuan of contracts that matured today.

The seven-day repo rate, a gauge of interbank funding availability, fell four basis points to 3.21 percent, according to a daily fixing from the National Interbank Funding Center.

PMI Rebounds

China’s manufacturing expanded in May at the fastest pace in five months, according to a Purchasing Managers’ Index (CPMINDX) released by the National Bureau of Statistics on June 1. Growth in services output was the quickest since November, a separate report showed today. A private report of the manufacturing PMI was at 49.4 in May, according to HSBC Holdings Plc and Markit Economics, below the dividing line between expansion and contraction at 50.

The yield on the 4.42 percent government bonds due March 2024 fell four basis points to 4.05 percent, data from the National Interbank Funding Center showed. The yield on the benchmark 10-year government bonds dropped 23 basis points in May, the biggest monthly fall since September 2011, according to ChinaBond data.

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

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

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