China Rate Swaps Drop Most Since June as Some Reserve Ratios Cut

China’s interest-rate swaps fell by the most since June after the government said it will lower reserve-requirement ratios at some rural banks.

The cost of the one-year rate swap, the fixed payment needed to receive the floating seven-day repurchase rate, dropped 18 basis points to 3.86 percent as of 4:47 p.m. in Shanghai. It reached 3.81 percent earlier, the lowest since July 9, according to data compiled by Bloomberg.

China will cut the amount of cash “qualified” rural banks are required to set aside as reserves to free up funds for lending to agricultural-related industries, the government said yesterday in a statement. The nation’s first-quarter economic growth was within a reasonable range, though there is downward pressure, according to the statement. Gross domestic product rose 7.4 percent from a year earlier during the period, the slowest growth since 2012.

The reserve-ratio “announcement was the trigger for the sell-off in interest-rate swaps,” said Wang Ming, a Shanghai-based marketing director at Shanghai Yaozhi Asset Management LLP. “Investors are betting that there will be more stimulus policies coming, but they may be disappointed.”

The People’s Bank of China said it drained 95 billion yuan ($15 billion) from the financial system today by selling 28-day repurchase agreements at a 4 percent yield. Its money-market operations withdrew a net 41 billion yuan in the past four days, following an injection of 55 billion yuan last week, data compiled by Bloomberg show.

‘Loosening Signal’

The seven-day repo rate, a gauge of interbank funding availability, was steady at 2.74 percent, according to a weighted average from the National Interbank Funding Center. It reached a one-month low of 2.59 percent yesterday.

The proposed reserve-ratio cuts aren’t expected to release a “significant” amount of liquidity, Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong, wrote in a research note yesterday. “Nonetheless, this is another loosening signal from the government, which suggests it is probably more concerned about the economic outlook as the property sector slowed sharply in the first quarter.”

Nomura continues to expect China will cut the reserve-requirement ratio for major banks in May or June, Zhang said. The last adjustment was a 50 basis point reduction to 20 percent in May 2012.

The yield on government bonds due March 2024 fell four basis points to 4.35 percent, according to data from the National Interbank Funding Center.

“Expectations are building that overall funding costs will fall to ensure growth,” said Chen Long, an analyst at Bank of Dongguan Co. in Guangdong province.

— With assistance by Fion Li, and Helen Sun

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