China Swap Rate Drops to Lowest Since 2012 on Reserve-Ratio Cut

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China’s interest-rate swaps declined to the lowest level since 2012 after the monetary authority cut the amount of cash banks must set aside as reserves in an effort to boost economic growth.

The People’s Bank of China reduced the main reserve-requirement ratio by 1 percentage point effective Monday, according to a statement on its website posted Sunday. The reduction, the biggest since the global financial crisis, brings the level down to 18.5 percent for large lenders, and lower for rural financial institutions. Data last week showed gross domestic product expanded 7 percent in the January-March quarter, the slowest pace since 2009.

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repurchase rate, declined 25 basis points, or 0.25 percentage point, to 2.73 percent as of 4:44 p.m. in Shanghai, according to data compiled by Bloomberg. That’s the lowest level since August 2012.

“Monetary easing is likely to be more aggressive in the second quarter amid growth and deflationary pressure,” said Zhou Hao, a Shanghai-based economist at Australia & New Zealand Banking Group Ltd. “We expect one more lending rate cut by the end of June, and the seven-day repurchase rate to approach 2.5 percent this week.”

The seven-day repurchase rate, a gauge of interbank funding availability, declined as much as 20 basis points to a one-year low of 2.66 percent, before paring losses to 2.71 percent according to a weighted average compiled by the National Interbank Funding Center. The PBOC has reduced the rate for seven-day reverse-repurchases agreements five times since the beginning of March, cutting it by a total of 50 basis points to 3.35 percent.

Bonds Advance

The monetary authority has lowered benchmark interest rates twice since November, with the last effective March 1. It has also extended 370 billion yuan ($60 billion) of loans to commercial lenders through its medium-term lending facility and another 170 billion yuan via the standing lending facility in the first quarter.

Government bonds gained, with the yield on debt due December 2024 falling 10 basis points to 3.49 percent, the lowest since March 12, National Interbank Funding Center prices show.

China’s securities regulator announced measures on Friday to clamp down on the use of shadow financing for equity purchases. They banned the margin-trading businesses of brokerages from using so-called umbrella trusts and allowed fund managers to lend shares to short sellers.

— With assistance by Helen Sun

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