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China Rate Swaps Drop to One-Year Low on Slower Growth Outlook

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China Rate Swaps Drop to One-Year Low on Slower Growth Outlook
July 16, 2010, 5:52 AM EDT

July 16 (Bloomberg) -- China’s interest-rate swaps dropped to a one-year low as a slowdown in economic growth prompted investors to speculate policy makers will favor borrowing costs that support the recovery.

Gross domestic product grew 10.3 percent in the second quarter, compared with an 11.9 percent gain in the previous three months, the statistics bureau said yesterday. The central bank yesterday allowed the yield on three-year bills to drop three basis points to 2.65 percent at an auction, the first decline in six weeks.

“The figures missed people’s estimates, causing concern among investors who were previously optimistic about the Chinese economy,” said Ye Yuzhang, a Shanghai-based interest-rate trader with Industrial Bank Co., a Chinese lender backed by a unit of HSBC Holdings Plc.. “The swaps also moved lower across all maturities because easier interbank liquidity helped push down the floating repo rates a lot.”

The five-year interest-rate swap, the fixed rate to receive the floating seven-day repurchase rate, fell 11 basis points this week to 2.89 percent as of 5:30 p.m. in Shanghai, the lowest since June 2009, data compiled by Bloomberg showed. The one-year swap also fell 10 basis points to 2.13 percent, approaching a two-month low.

Money Markets

The People’s Bank of China added a net 49 billion yuan ($7.2 billion) of cash into the money market via open-market operations, injecting funds for an eighth consecutive week. The additions have helped lower the seven-day repo rate from a 19- month high on June 2.

The seven-day repurchase rate, which measures lending costs between banks, slumped 55 basis points this week to 1.87 percent, according to a fixing rate published daily by the National Interbank Funding Center. A basis point is 0.01 percentage point.

Ye predicted the five-year swap rate may slide as much as 10 basis points to 2.8 percent before rebounding.

“Slower growth in June doesn’t definitely mean we’ll see a worse economy in the second half,” Ye said. “I don’t think the swap rates will fall continuously. That could signal a double- dip in the economy.”

Bonds, Yuan Gain

Government bonds advanced this week on banks’ rising demand for debt after a cash shortage eased. The yield on the 3.25 percent note due in May 2020 dropped six basis points to 3.28 percent, and the price of the security rose 0.51 per 100 yuan face amount to 99.70, the funding center data showed.

China’s yuan climbed against the dollar in two weeks as signs the U.S. economy is losing momentum bolstered demand for the local currency.

The greenback was poised for a third weekly decline against the euro before reports today that economists said will show U.S. household sentiment deteriorated this month and consumer prices fell in June.

“The yuan’s move today is simply following the euro and other currencies in the basket,” said Liu Dongliang, a Shenzhen-based analyst at China Merchants Bank Co., the country’s fifth-largest lender by market value.

Managed Currency

The yuan rose 0.05 percent to 6.7750, from 6.7785 yesterday, according to the China Foreign Exchange Trade System. It was little changed this week.

China’s central bank said on June 19 it will manage the yuan against a basket of currencies and expand the exchange rate’s flexibility after keeping it little changed since July 2008.

The managed float of the yuan’s exchange rate will help curb inflation and ease asset bubbles, central bank Deputy Governor Hu Xiaolian, said in a statement on the monetary authority’s website yesterday.

--Belinda Cao, Judy Chen. Editors: Sandy Hendry, James Regan


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