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China’s Swap Rate Falls to 18-Month Low as Manufacturing Slows

June 01, 2012

China’s interest-rate swaps fell to an 18-month low on speculation the central bank will cut interest rates after a government-backed survey showed manufacturing grew less than forecast in May.

The Purchasing Managers’ Index fell for the first time in six months, dropping to 50.4 from 53.3 in April, the statistics bureau and logistics federation said today. The median forecast of 27 economists in a Bloomberg survey was for a reading of 52. China cut the amount of cash that banks must set aside as reserves in May for the third time in six months.

“Downside growth pressure is increasing and is likely to drag regional growth lower, keeping downside pressure on swaps,” Wee-Khoon Chong, a strategist at Societe Generale SA in Hong Kong, wrote in a report after the data release. “This data will no doubt strengthen market call for easing both in terms of reserve-ratio and benchmark lending-rate cuts.”

The one-year swap contract, the fixed cost needed to receive the floating seven-day repurchase rate, fell one basis point to 2.44 percent as of 4:30 p.m. in Shanghai, according to data compiled by Bloomberg. It dropped 11 basis points this week and touched 2.38 percent today, the lowest level since November 2010.

The central bank drained 57 billion yuan ($9 billion) of capital from the financial system this week, a third weekly withdrawal, according to data compiled by Bloomberg.

Policy Outlook

The central bank will lower the reserve ratio two more times this year and keep the benchmark lending rate unchanged, according to Societe Generale. Before the next round of easing, the seven-day repurchase rate may trade between 2.5 percent and 3.25 percent, Chong said in an interview.

The seven-day repo rate, which measures interbank funding availability, rose 21 basis points to 2.38 percent, according to a weighted average rate compiled by the National Interbank Funding Center. It fell 12 basis points in the week.

The yield on the 3.41 percent government bonds due March 2019 dropped one basis point today and rose three basis points this week to 3.13 percent, according to the Interbank Funding Center. A basis point is 0.01 percentage point.

To contact Bloomberg News staff for this story: Judy Chen in Shanghai at

To contact the editor responsible for this story: Sandy Hendry at

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