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China Swaps Fall by Most Since December After Reserve-Ratio Cut

China’s interest-rate swaps fell by the most since December after the central bank cut reserve requirements for lenders to help ease a cash shortage in the financial system.

The People’s Bank of China said over the weekend it will reduce the proportion of cash that banks must set aside by half a percentage point to 20.5 percent from Feb. 24. Standard Chartered Plc forecasts at least three more reductions this year, while HSBC Holdings Plc sees a minimum of two.

“The cut itself wasn’t a surprise, but markets had slightly scaled down their expectations for near-term action,” Frances Cheung, a strategist at Credit Agricole CIB in Hong Kong, wrote in a research note today.

The one-year swap rate, the fixed cost to receive the seven-day repurchase rate, fell 10 basis points, or 0.10 percentage point, to 3.32 percent in Shanghai, according to data compiled by Bloomberg. The decline was the most since Dec. 16. Cheung forecast further reserve-ratio cuts of up to 200 basis points this year.

A 50-basis point cut may add 400 billion yuan ($64 billion) to the financial system, according to Australia & New Zealand Banking Group Ltd. UBS AG says the move frees up about 350 billion yuan and may have been triggered by tight interbank liquidity. The previous reduction in December was the first since 2008.

Repo Rate Steady

The Communist Party aims to sustain the nation’s expansion without undermining a campaign to tame inflation that saw home prices drop in 47 of the 70 biggest cities in January. Policy makers may refrain from interest-rate cuts until nearer mid-year when consumer-price gains have slowed to below 3 percent from 4.5 percent last month, HSBC economist Qu Hongbin said yesterday in Hong Kong.

The People’s Bank of China gauged demand for 28- and 91-day repurchase agreements this week, according to a trader at a primary dealer required to bid at the auctions. The central bank didn’t gauge demand for bill sales, the trader said. The monetary authority has suspended one-year bill sales for seven weeks and three-month securities for eight weeks.

The seven-day repurchase rate, a gauge of funding availability in the financial system, rose six basis points to 5.38 percent, according to a weighted average compiled by the National Interbank Funding Center. The yield on government debt due August 2021 was down three basis points at 3.52 percent.

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