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China Swaps Post Biggest Monthly Decline Since ’08 on Slowdown

China’s one-year interest-rate swaps fell, capping their biggest monthly slide since 2008, on concern Europe’s worsening debt crisis will hurt exports, deepening a slowdown in the world’s second-largest economy.

Premier Wen Jiabao said growth faces increasing downward pressure, the Hunan Daily reported yesterday, citing a speech made in the southern Chinese province on May 25. Policy easing, including faster project approvals and central bank guidance for borrowing, may lead to additional credit of as much as 600 billion yuan ($94 billion), Deutsche Bank AG wrote in a note yesterday.

“The yuan interest-rate swaps are lower on the back of the heightened European crisis and also uncertainty over China’s growth,” said Wee-Khoon Chong, a strategist at Societe Generale SA in Hong Kong. “Overall market sentiment is very fragile and it will need significant positive news to turn it around.”

The one-year swap rate, the fixed cost to receive the seven-day repurchase rate, slid 11 basis points today to 2.45 percent in Shanghai, according to data compiled by Bloomberg. The rate fell 80 basis points this month, the most since November 2008, when global credit markets seized following the collapse of Lehman Brothers Holdings Inc.

China’s exports and industrial output grew in April at the slowest pace since 2009, based on official figures that exclude distortions arising from changes in the timing of the Lunar New Year holiday. New-home prices in the eastern city of Wenzhou fell 12 percent, while prices in Beijing and Shanghai declined 1 percent.

PBOC Operations

The People’s Bank of China sold 30 billion yuan of 91-day repurchase agreements at a yield of 3.14 percent today, according to traders at primary dealers required to bid at the auctions. The monetary authority withdrew 78 billion yuan using open-market operations last week and 64 billion yuan in the five days ended May 18, when lenders’ reserve requirements were lowered for the third time in six months.

The seven-day repurchase rate, a gauge of funding availability in the financial system, decreased 18 basis points, or 0.18 percentage point, to 2.17 percent today in Shanghai, according to a weighted average compiled by the National Interbank Funding Center. The rate plunged 161 basis points this month and touched 2 percent on May 24, the lowest level since April 2011.

The yield on 3.51 percent government bonds due February 2022 declined two basis points today and 18 basis points this month to 3.36 percent.

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