China Swap Rate Drops Most in Three Weeks on More Reserves Cuts

China’s interest-rate swaps fell by the most in more than three weeks, after the central bank expanded cuts in reserve requirements to some larger lenders.

China Minsheng Banking Corp., Industrial Bank Co., and Bank of Ningbo Co. have received permission from the People’s Bank of China to lower their reserve ratios, spokesmen at the three banks said today, while China Merchants Bank Co. also got approval, according to a research note by China International Capital Corp. Ratios for most city commercial banks, non-county level rural commercial lenders and rural cooperatives are being cut by 50 basis points today, the PBOC said last week.

“The message is that the PBOC is ready for further selective easing,” said Dariusz Kowalczyk, a senior economist at Credit Agricole SA in Hong Kong. “On one hand, this is positive for growth, but on the other, inclusion of larger private banks in targeted RRR cuts lowers the odds for a nationwide move, and this is the key message from the news.”

The cost of one-year interest-rate swaps, the fixed payment needed to receive the floating seven-day repurchase rate, dropped 10 basis points, the most since May 21, to 3.40 percent as of 4:30 p.m. in Shanghai, data compiled by Bloomberg show.

The seven-day repo rate, a gauge of interbank funding availability, dropped three basis points, or 0.03 percentage point, to 3.02 percent, according to a weighted average from the National Interbank Funding Center. It reached 2.99 percent earlier, the lowest level since May 6.

Borrowing Costs

Investors should realize that the economy is in “quasi-deflation” mode and a prudent monetary policy should focus on lowering funding costs, the China Securities Journal reported today, citing Xu Nuojin, deputy head of the statistics department at the PBOC. Growth will slow without sufficient investment, said Xu.

The yield on the 4.42 percent government bonds due March 2024 rose one basis point to 4.09 percent, National Interbank Funding Center prices show.

“The market expectation is that the PBOC will keep borrowing costs low to stabilize growth,” said Cao Yang, an analyst at Shanghai Pudong Development Bank Co. in Shanghai. “The interbank market is usually more sensitive to policy direction, and the market probably won’t tighten much even as we approach the quarter-end.”

The PBOC asked banks to submit orders for 14- and 28-day repurchase agreements, seven- and 14-day reverse repos, and 91-day bills this week, according to a trader at a primary dealer required to bid at the auctions. There’s 65 billion yuan ($10.5 billion) of repo contracts maturing this week, data compiled by Bloomberg show.

— With assistance by Helen Sun

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