China's Swap Rates Decline

China's swap rates fell to a three- month low on speculation the central bank will lower the reserve requirement for lenders to spur economic growth.

The one-year offshore yuan swap slid 1 basis point to 3.18 percent, the lowest since May 15, as of 12:40 p.m. today in Tokyo, according to data compiled by Bloomberg. It fell 9 basis points last week. The five-year swap rate has declined 20 basis points from a week ago to 3.625 percent on speculation increased money supply will push all borrowing costs lower.

Chinese policy makers are switching focus to sustaining growth as well as cooling inflation, after expansion in the world's fourth-biggest economy slowed for four consecutive quarters. The central bank will ``fine-tune'' monetary policy to strike a balance between supporting expansion and fighting inflation, according to its second-quarter report Aug. 15.

Swaps are derivative contracts used to guard against or gain from interest-rate fluctuations and involve the exchange of floating-rate and fixed-rate payments. Investors betting on rising borrowing costs will seek to pay a fixed rate. Those betting on a decline agree to pay a floating rate, which in these contracts is based on China's seven-day repurchase rate.

The difference between the one- and five-year offshore swap rates narrowed to 42 basis points, or 0.42 percentage point, on Aug. 22 after the five-year swaps declined from a peak of 4.76 percent on July 4, according to data compiled by Bloomberg. The average gap between the rates was 60 basis points this quarter.

The People's Bank of China has kept the benchmark one-year deposit rate unchanged this year at 4.14 percent to avoid attracting speculative capital. In the first half, the central bank ordered lenders to set aside more money as reserves five times, lifting the requirement to a record 17.5 percent of deposits.

Last month, the central bank increased the 2008 lending quotas for national banks by 5 percent and regional lenders by 10 percent to help finance small and medium-sized companies and agriculture, according to reports by Goldman Sachs Group Inc., BNP Paribas SA, China Merchants Bank Co., and Industrial Bank Co.

China, Bloomberg
8/26/2008 1:04:40 PM