China Rate Swap Set for Fifth Monthly Drop as Central Bank Eases

China’s interest-rate swaps were headed for a fifth monthly drop, the longest run of declines since the height of the global financial crisis, as policy makers favor lower borrowing costs to support the economy.

The People’s Bank of China sold 20 billion yuan ($3.2 billion) of repurchase agreements yesterday, less than the 50 billion yuan that matured, and its open-market operations added a net 164 billion yuan to the financial system in the last two weeks. The yuan dropped to a one-month low of 6.2639 per dollar in Shanghai after the central bank cited Governor Zhou Xiaochuan as saying that the economy is in a “rare” and “complicated” situation.

The cost of one-year swaps, the fixed payment needed to receive the floating seven-day repurchase rate, fell 25 basis points, or 0.25 percentage point, this month to 3.51 percent as of 5:29 p.m. in Shanghai, data compiled by Bloomberg show. It’s dropped 171 basis points this year and one basis point today. The last time the contract slid for five or more consecutive months was in the period ended January 2009.

“The big trend is that the PBOC is trying to lower financing costs,” said Deng Haiqing, a fixed-income analyst at Citic Securities Co. in Beijing. “The central bank will take steps to smooth any volatility in the money markets to stabilize expectations, and so boost investment.”

China’s industrial profits increased 9.6 percent in April from a year earlier, the National Bureau of Statistics reported today. That compared with an increase of 10.7 percent in March. The PBOC and its branches must implement prudent monetary policy, keep financial markets stable and create a good monetary and financial environment to support local economic development, Zhou said during a May 25-26 visit to a central bank branch in Jiaxing city, according to a statement posted on the PBOC website.

‘Targeted Easing’

The monetary authority may continue “targeted easing,” including cuts in reserve-requirement ratios for some lenders and bond purchases to stabilize growth, according to a commentary carried in the China Securities Journal today.

The seven-day repo rate, a gauge of funding availability in the interbank market, declined 98 basis points this month to 3.20 percent, according to a daily fixing from the National Interbank Funding Center. It fell three basis points today.

The PBOC asked lenders to submit orders for 14- and 28-day repurchase contracts, 14-day reverse repos and 91-day bills for open-market operations tomorrow, according to a trader at a primary dealer required to bid at the auctions.

The yield on 10-year government bonds declined 17 basis points this month and three basis points today to 4.16 percent, according to prices from the National Interbank Funding Center.

— With assistance by Helen Sun

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