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China’s Borrowing Costs Expected to Drop

The cost of locking in Chinese borrowing costs is poised to drop below the central bank’s savings benchmark for the first time since 2012 as speculation mounts that interest rates will be cut.

The one-year swap, a fixed payment to receive the floating seven-day repurchase rate, has fallen 2.13 percentage points so far in 2014 and ended yesterday at 3.09 percent, near the official 12-month deposit rate of 3 percent. The last time the contracts were lower than the benchmark was in 2012, when the People’s Bank of China reduced savings and loan costs twice.

Asia’s largest economy is forecast to report third-quarter growth of 7.2 percent next week, the least since 2009, after data for September showed overall financing missed estimates and inflation eased to the slowest since 2010. While the central bank lowered the rate on 14-day repurchase agreements this week, a cut in the benchmark is the most direct way to shrink financing costs, the China Securities Journal said in a commentary yesterday. Credit Agricole CIB says there’s a 40 percent likelihood of a reduction.

Bloomberg [1]

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