China Swap Rate Drops to Six-Week Low on More Targeted Easing

China’s one-year interest-rate swaps fell to a six-week low after the central bank introduced more targeted easing measures.

The People’s Bank of China gave a 12 billion yuan ($2 billion) re-discount quota to its local branches on Aug. 8 to support lending to small businesses and the agricultural sector, according to a statement on its website. The monetary authority will keep liquidity relatively loose for the rest of the year, “but the loosening probably won’t be as strong as in the first half,” according to a front-page commentary in the China Securities Journal today.

The cost of one-year swaps, the fixed payment needed to receive the floating seven-day repurchase rate, fell three basis points, or 0.03 percentage point, to 3.69 percent as of 4:34 p.m. in Shanghai, data compiled by Bloomberg show. They touched 3.66 percent earlier, the lowest level since July 1.

“The increase in the re-discount quota is another targeted monetary policy, indicating the central bank will continue adopting measures aimed at structural change,” Wei Wei, a Shanghai-based analyst at Ping An Securities Co., wrote in a research note today. “The policy is more moderate than the targeted reserve-ratio cut earlier this year, probably a signal that any follow-on easing measures in the second half will be weaker.”

The seven-day repo rate, a gauge of interbank funding availability, fell for a seventh day, the longest run since February. The rate dropped five basis points to 3.43 percent, after declining 42 basis points last week, according to a weighted average from the National Interbank Funding Center.

Credit Conditions

The China Monetary Conditions Index, a weighted average of loan growth, real interest rates and China’s real effective exchange rate compiled by Bloomberg, rose 6.71 points to 82.81 in the second quarter, the biggest increase since the July-September period in 2012, indicating the central bank loosened monetary conditions at the fastest pace in almost two years.

Consumer prices increased 2.3 percent in July from a year ago, matching the previous month’s pace and below the government’s target of 3.5 percent, data from the National Bureau of Statistics showed on Aug. 9.

The yield on the government’s 4 percent bonds due June 2024 was unchanged at 4.29 percent, according to data from the National Interbank Funding Center.

— With assistance by Helen Sun

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