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China Rate Swap Posts Biggest Weekly Drop Since June on Easing

China Rate Swap Set for Biggest Weekly Drop Since June on Easing
A man walks past the People's Bank of China (PBOC) headquarters in Beijing, China. Photographer: Tomohiro Ohsumi/Bloomberg

The cost of locking in China’s interest rates for a year fell this week by the most since June after the government announced plans to cut reserve requirements for some rural banks.

The one-year rate swap, the fixed payment needed to receive the floating seven-day repurchase rate, dropped 43 basis points this week to 3.77 percent as of 4:52 p.m. in Shanghai, according to data compiled by Bloomberg. It fell six basis points today following a 22 basis point slide yesterday that was the biggest decline since June 21, when the central bank used targeted injections of funds to alleviate a record cash crunch.

China will lower the amount of cash “qualified” rural banks are required to set aside as reserves to free up funds for lending to agriculture-related industries, according to a statement posted on the central government’s website on April 16. Monetary policy is likely to stay “neutral and relatively loose” in the short term, according to a front-page commentary in the China Securities Journal today.

“The reserve-requirement ratio announcement was the catalyst for the sell-off in the interest-rate swaps,” said Wang Ming, marketing director at Shanghai Yaozhi Asset Management LLP.

The seven-day repo rate, a gauge of interbank funding availability, declined 93 basis points, or 0.93 percentage point, this week to 2.82 percent, according to a weighted average from the National Interbank Funding Center. It increased seven basis points today.

The People’s Bank of China’s money-market operations pulled a net 41 billion yuan ($6.6 billion) from the financial system in the past five days, following a 55 billion yuan injection last week, data compiled by Bloomberg show.

There will probably be more targeted easing, though there is no need for a universal cut in banks’ reserve-requirement ratios, the China Securities Journal commentary said.

The yield on government bonds due March 2024 fell 24 basis points this week to 4.36 percent, according to prices from the National Interbank Funding Center. The rate increased one basis point today. The benchmark 10-year yield was 4.27 percent yesterday, the lowest since Nov. 6, ChinaBond data show.

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