China Swaps Drop to 33-Month Low as PBOC Seen Ensuring Liquidity

China’s interest-rate swaps declined to the lowest level since 2012 on speculation the central bank will restrain borrowing costs amid mounting debt pressure.

China is pushing rates lower to revive growth in an economy expanding at the slowest pace in six years and to lessen the risk posed by a debt buildup. Local governments reported 16 trillion yuan ($2.6 trillion) of liabilities in a review earlier this year, the China News said on its website, citing a Ministry of Finance official it didn’t name. That indicates a 47 percent jump from 10.9 trillion yuan in June 2013.

The cost of one-year swaps, the fixed payment to receive the floating seven-day repurchase rate, fell 10 basis points, or 0.1 percentage point, to 2.53 percent in Shanghai, according to data compiled by Bloomberg. That’s the lowest since July 2012.

“The central bank may be shifting its priority to keeping liquidity loose to ensure economic growth targets are met,” said Deng Haiqing, a Citic Securities Co. analyst in Beijing. “In contrast to the tightly balanced money market in 2013 and 2014, we expect it to remain ample as the new normal.”

The People’s Bank of China and the Finance Ministry are considering measures to ensure this year’s municipal bond sales are attractive to investors, according to people familiar with the matter. The PBOC is discussing adopting unconventional policies including purchasing local government notes, Market News International reported Monday, citing unidentified people.

Regional authorities are set to sell more than 1.7 trillion yuan of debt this year, up from 400 billion yuan in 2014. Jiangsu province, which was to issue 64.8 billion yuan of general notes on April 23 to swap for debt maturing this year, has delayed the sale.

‘Inflated Numbers’

Sovereign bonds rallied, with the yield on notes due December 2024 sliding seven basis points to 3.43 percent, the lowest since March 4, according to National Interbank Funding Center prices.

The ministry found some regional authorities had inflated the amount of outstanding debt in a submission in January, and asked them to re-examine the numbers and report again in March, according to two people familiar with the matter. The governments should consider whether they have included any borrowings they don’t have to repay, the people said.

Separately, Baoding Tianwei Group Co., which became China’s first state-owned company to default on an onshore bond last week, will receive loans from China Construction Bank Corp. to repay debt after coordination by the central bank, Caixin reported Saturday, citing a person it didn’t identify. The loan terms haven’t been decided yet, according to the report. The bank, as the lead underwriter of the company’s notes, will hold an investor meeting on May 13.

The seven-day repo rate, a gauge of interbank funding availability, was little changed at 2.42 percent, according to a weighted average compiled by the National Interbank Funding Center. It earlier declined to 2.38 percent, the lowest since March 2014.

— With assistance by Helen Sun

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