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China Swap Rate Drops to Eight-Week Low as Inflows Seen Rising

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Jan. 17 (Bloomberg) -- China’s one-year interest-rate swap dropped to an eight-week low on speculation capital inflows will quicken as the world’s second-biggest economy recovers, boosting cash in the financial system.

Yuan positions at local banks accumulated from foreign-exchange purchases increased 134.6 billion yuan ($21.6 billion) in December, the biggest increase in 11 months, according to data published on Jan. 15 by the People’s Bank of China. The gauge may rise by 100 billion yuan in January, according to a commentary today in the official China Securities Journal. An official report tomorrow may show China’s growth quickened to 7.8 percent last quarter, from a three-year low of 7.4 percent in the previous period, a Bloomberg survey of economists showed.

“The market is speculating that a pickup in growth momentum will help attract more capital inflows,” said Liu Junyu, a bond analyst in Shenzhen at China Merchants Bank Co., the nation’s sixth-biggest lender. “We still need to watch out for possible cash shortages before the Lunar New Year Holiday.”

The one-year swap contract, the fixed cost needed to receive the floating seven-day repurchase rate, dropped three basis points to 3.31 percent as of 4:30 p.m. in Shanghai, according to data compiled by Bloomberg. It touched 3.29 percent earlier, the lowest level since Nov. 26. Local markets will be shut from Feb. 11 through Feb. 15 for the Lunar New Year holiday.

The seven-day repurchase rate, which measures interbank funding availability, fell three basis points, or 0.03 percentage point, to 2.75 percent, according to a weighted average rate compiled by the National Interbank Funding Center.

The PBOC added 10 billion yuan to the financial system via 14-day reverse-repo contracts today at a yield of 3.45 percent, according to a trader required to bid at the auctions.

The yield on the 2.95 percent government bond due August 2017 dropped two basis points to 3.23 percent, according to the Interbank Funding Center.

To contact Bloomberg News staff for this story: Judy Chen in Shanghai at xchen45@bloomberg.net

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