Bloomberg News

China’s Swaps Slide Most Since 2008 as Central Bank Adds Funds

September 30, 2011

Sept. 30 (Bloomberg) -- China’s interest-rate swaps slid the most since 2008 this month, snapping a five-month advance, on speculation the central bank will allow cash in the banking system to rise to support growth as the global economy slows.

“A possible hard landing and capital outflows have become concerns in China,” Ju Wang, a Singapore-based strategist at Barclays Capital, wrote in a research note today. “This has increased expectations that the People’s Bank of China will ease via reserve requirement cuts.”

The central bank injected 36 billion yuan ($5.6 billion) into financial markets this week, an 11th straight week of inflows, according to data compiled by Bloomberg. The PBOC has raised interest rates five times in the past year and lifted the amount of cash lenders must set aside as reserves six times in 2011 to a record as it seeks to temper rising consumer prices.

The one-year swap rate, the fixed cost paid to receive the floating seven-day repurchase rate, fell 73 basis points, or 0.73 percentage point, this month to 3.74 percent as of 4:12 p.m. in Shanghai, according to data compiled by Bloomberg. That is the first decline since March and the biggest since November 2008. It dropped eight basis points today.

China’s manufacturing industry contracted for a third month in September, according to a report today from HSBC Holdings Plc and Markit Economics. The purchasing managers’ index of factory output was unchanged at 49.9 and compared with a preliminary 49.4 figure published last week. The gauge was below 50, the level that separates expansion from contraction.

‘Hard Landing’

The economy, which grew 9.5 percent last quarter, will expand less than 5 percent annually by 2016, according to 95 percent of respondents in a quarterly Bloomberg Global Poll of investors, analysts and traders. Twelve percent see such a slowdown within a year, and 47 percent said it will occur in two to five years.

China faces no risk of a “hard landing,” Lu Zhongyuan, deputy director of the State Council Development Research Center, said at a briefing in Beijing on Sept. 28.

The seven-day repo rate, a gauge of funding availability in the financial system, rose eight basis points this month to 5.02 percent in Shanghai, according to a weighted average compiled by the National Interbank Funding Center. The rate fell six basis points today.

--Editors: Simon Harvey, Anil Varma

To contact the reporter on this story: Kyoungwha Kim in Beijing at kkim19@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net


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