China Rate Swap Drops to One-Month Low as New Lending Declines

The cost of locking in China’s interest rates sank to a one-month low as data showed a drop in lending and the slowest money-supply expansion on record.

Aggregate financing, the broadest measure of new credit fell 19 percent from a year earlier to 2.07 trillion yuan ($333 billion) in March and growth in M2 money supply slowed to 12.1 percent from 13.3 percent, the People’s Bank of China reported today. A net 28 billion yuan was added to the financial system today as 50 billion yuan of six-month deposits from the finance ministry were auctioned, 150 billion yuan of repurchase agreements matured and 172 billion yuan of repos were sold.

The one-year rate swap, the fixed payment needed to receive the floating seven-day repurchase rate, fell five basis points, or 0.05 percentage point, to 4.08 percent as of 4:44 p.m. in Shanghai, according to data compiled by Bloomberg. It reached 4.04 percent earlier, the lowest level since March 14.

“Without a reserve-requirement ratio cut, M2 growth is likely to slow further, with GDP growth possibly dropping below 7 percent in the second or third quarters,” Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong, wrote in a research note today. He forecast ratios will be lowered 50 basis points in the next two months, and again in the third quarter.

Gross domestic product probably increased 7.3 percent from a year earlier in the first quarter, the least since the same period of 2009, according to the median estimate of economists surveyed by Bloomberg before data due tomorrow.

Repos Sold

The seven-day repo rate, a gauge of interbank funding availability, declined 11 basis points to 3.41 percent in Shanghai, according to a weighted average from the National Interbank Funding Center. It touched 3.02 percent yesterday, the lowest since April 4.

“The PBOC will have to use open-market operations to maintain accommodative monetary conditions over the foreseeable future, especially when the M2 growth has declined and shadow-banking activities have slowed,” Australia & New Zealand Banking Group Ltd. economists Liu Li-gang in Hong Kong and Zhou Hao in Shanghai wrote in a note today.

The PBOC sold 93 billion yuan of 28-day repos and 79 billion yuan of 14-day contracts today, according to a trader at a primary dealer required to bid at the auctions. The PBOC’s money-market operations added a net 55 billion yuan to banks last week as more repurchase agreements matured than were sold, data compiled by Bloomberg show.

“We’re not looking for a period of liquidity tightness any time soon,” said Becky Liu, a Hong Kong-based rates strategist at Standard Chartered Plc. The slowdown in M2 growth gives “some room to loosen,” she said.

The yield on the 4.42 percent government bonds due March 2024 fell 18 basis points to 4.42 percent, according to prices from the National Interbank Funding Center.

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