China One-Year Swap Rate Drops on Bets Foreign Inflows Will Rise

China’s one-year interest-rate swap dropped to the lowest level since December on speculation foreign capital inflows will increase as the world’s second-largest economy recovers.

Yuan positions accumulated from foreign-exchange purchases increased by 134.6 billion yuan ($21.7 billion) in December, the biggest in 11 months, data published by the central bank yesterday showed. The People’s Bank of China gauged demand for seven- and 14-day reverse-repurchase contract operations tomorrow, according to a trader required to bid at the auctions.

“The data are a confirmation of the market’s belief that capital is flowing into China,” said Pin Ru Tan, a Hong Kong-based rates strategist at HSBC Securities Asia Ltd. “Generally, the growth story is there and the yuan is no longer on a weak path like last year.”

The one-year swap contract, the fixed cost needed to receive the floating seven-day repurchase rate, fell one basis point to 3.33 percent as of 10:54 a.m. in Shanghai, according to data compiled by Bloomberg. It touched 3.32 percent, the lowest level since Dec. 28. A basis point is 0.01 percentage point.

The seven-day repurchase rate, which measures interbank funding availability, dropped one basis point to 2.80 percent, according to a weighted average rate compiled by the National Interbank Funding Center.

A government report due Jan. 18 will show China’s economy grew 7.8 percent in the fourth quarter, the fastest pace in nine months, according to the median estimate in a Bloomberg News survey of 53 economists.

The yuan has strengthened 0.2 percent this year after rising 1 percent in 2012.

The yield on the 2.95 percent government bond due August 2017 gained one basis point to 3.25 percent, according to the Interbank Funding Center.

— With assistance by Judy Chen

Before it's here, it's on the Bloomberg Terminal.