Bloomberg News

China Swaps Drop to Four-Month Low as More Policy Easing Likely

May 14, 2012

China’s one-year interest-rate swaps slid to the lowest level since January on speculation policy makers will roll out more stimulus to shore up growth in the world’s second-largest economy.

China’s slowdown may deepen and growth this year will be in the “mid-7 percent range,” a pace unseen since 1999, Ramin Toloui, Pacific Investment Management Co.’s global co-head of emerging markets portfolio management in Singapore, said in e- mailed comments May 13. The People’s Bank of China cut banks’ reserve requirements by 50 basis points on May 12, after data showed April industrial production, new loans and retail sales grew less than forecast.

“Policy makers will need to orchestrate large-scale bank lending, prevent yuan appreciation, cut the reserve ratio further and perhaps lower policy rates if they want to achieve their growth goal,” Dariusz Kowalczyk, a Credit Agricole CIB strategist in Hong Kong, wrote in a report today.

The one-year swap rate, the fixed cost to receive the seven-day repurchase rate, fell nine basis points to 2.86 percent at 9:36 a.m. in Shanghai, according to a weighted average compiled by the National Interbank Funding Center. It touched 2.80 percent, the lowest level since Jan. 4.

In March, China set a growth goal of 7.5 percent for the year, the first time it has targeted annual expansion of less than 8 percent since 2004.

Severe Consequences

“The time for such policy adjustment is now, and any further significant delay may have severe economic and market consequences not only for China, but for the whole region,” Kowalczyk wrote.

The People’s Bank of China will sell 60 billion yuan ($9.5 billion) of 28-day repurchase agreements today, according to a trader at a primary dealer required to bid at the auctions.

The seven-day repurchase rate, a gauge of funding availability in the financial system, dropped 29 basis points to 2.82 percent in Shanghai, according to a weighted average compiled by the National Interbank Funding Center. The yield on 3.51 percent government bonds due February 2022 fell nine basis points, or 0.09 percentage point, to 3.40 percent.

To contact Bloomberg News staff for this story: Kyoungwha Kim in Singapore at

To contact the editor responsible for this story: James Regan at

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