China Rate Swap Completes Biggest Quarterly Decline in Two Years

China’s one-year interest-rate swaps declined by the most in more than two years this quarter on signs of a slowdown in the world’s second-largest economy.

An official Purchasing Managers’ Index is forecast to show manufacturing expanded in March at the slowest pace since June, according to the median estimate in a Bloomberg survey before data tomorrow. A preliminary gauge by HSBC Holdings Plc and Markit Economics pointed to a third monthly decline in output. Premier Li Keqiang urged reforms that will help bring about more stable economic growth, the government said in a statement after his March 26-28 visit to Liaoning province and Inner Mongolia.

The cost of one-year swaps, the fixed payment needed to receive the floating seven-day repo rate, declined 94 basis points, or 0.94 percentage point, to 4.29 percent as of 4:35 p.m. in Shanghai, data compiled by Bloomberg show. That was the biggest drop since the fourth quarter of 2011 and the level compares with a five-year average of 3.02 percent. The contract rose three basis points today.

“The first-quarter slide in rate swaps was the result of a few factors, including the return of cash to the banking system after the Lunar New Year, an economic slowdown and the central bank’s operations before the widening of the yuan’s trading band,” said Wang Ming, a Shanghai-based marketing director at Shanghai Yaozhi Asset Management LLP. “Although liquidity is better than the worst periods last year, it is still relatively tight compared with history.”

Demand Gauging

The seven-day repurchase rate, a gauge of funding availability in the interbank market, declined 108 basis points this quarter to 4.17 percent, according to a daily fixing compiled by the National Interbank Funding Center.

The People’s Bank of China asked lenders to submit orders for 14- and 28-day repo contracts this week, as well as seven-and 14-day reverse repos and 91-day bills, according to a trader at a primary dealer required to bid at the auctions.

Liquidity will tighten in April as corporate tax payments collected by local governments are deposited with the central bank, Shenyin Wanguo Securities Co. analysts led by Qu Qing wrote in a note today. “Even if the central bank resumes reverse-repo operations, money-market rates will still be higher than the lows in the first quarter,” said the report.

Government bonds rallied in the first quarter, with the yield on one-year sovereign debt falling 111 basis points to 3.11 percent as of March 28, ChinaBond data show. The 10-year rate declined four basis points to 4.51 percent.

— With assistance by Helen Sun

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