China’s Swaps Drop for Third Day as Manufacturing Growth Slows

Nov. 1 (Bloomberg) -- China’s interest-rate swaps dropped for a third day after manufacturing growth slowed, stoking speculation the central bank will loosen monetary policy.

The Purchasing Managers’ Index fell to 50.4 in October from 51.2 in September, the China Federation of Logistics and Purchasing said in a statement today. That compared with the median estimate of 51.8 in a Bloomberg News survey of 16 economists. A reading above 50 indicates expansion.

“The short end of the interest-rate swap curve is bound to fall as there will be mounting speculation of policy easing,” said Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB. “We still don’t see a rate cut but we expect lowering of yields in the central bank’s open-market operations to improve market liquidity.”

The one-year swap rate, the fixed cost to receive the seven-day repurchase rate, decreased seven basis points, or 0.07 percentage point, to 3.52 percent in Shanghai. The seven-day repurchase rate, a gauge of funding availability in the financial system, fell 57 basis points to 4.40 percent, according to a weighted average compiled by the National Interbank Funding Center.

The People’s Bank of China kept the yield on one-year bills unchanged at 3.5840 percent today for a 10th consecutive auction, according to a trader at a primary dealer required to bid at the auctions. The monetary authority issued 10 billion yuan ($1.6 billion) of the securities. The central bank also skipped open-market operations today.

Bonds Rise

“Such a move added to the weaker than expected PMI will most certainly reignite market calls for loosening,” said Wee-Khoon Chong, a Hong Kong-based fixed-income strategist at Societe Generale SA.

Government bonds rose for a fifth day with the yield on 3.44 percent debt due June 2016 falling six basis points to 3.51 percent today, according to the Interbank Funding Center.

In February, the central bank published a list of 50 primary dealers allowed to participate in open-market operations, including Industrial & Commercial Bank of China Ltd., Agricultural Bank of China Ltd., Bank of China Ltd., China Construction Bank Corp., China Citic Bank Corp., Industrial Bank Co. and Postal Savings Bank of China.

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