China will expand trading of interest-rate swaps next month to accelerate the development of derivatives and help companies and financial institutions hedge risks, the central bank said.

 

Qualified members of the nation's interbank bond market will be allowed to trade yuan-denominated interest-rate swaps, the People's Bank of China said on its Website at the weekend.

 

The plan will be effective 30 days from January 18, the bank said.

 

"This shows the central bank is determined to promote financial derivatives trading in the interbank market," said Zhang Lan, a fixed-income analyst with Bank of Nanjing Co, partly owned by BNP Paribas SA.

 

China first allowed commercial banks to trade interest-rate swaps under a pilot program in early 2006, said Bloomberg News.

 

Such transactions enable parties to exchange fixed-rate payments with floating-rate payments and vice versa to hedge risk.

 

The Association of Financial Market Institutional Investors, which is under the central bank's supervision, asked dealers to sign a master agreement in December to speed up the development of derivatives trading.

 

"So far the more experienced international banks have been more active than local banks and they often trade on behalf of their customers," Zhang said.

 

The Chinese central bank has given commercial lenders more leeway over the interest rates they offer and is developing the bond market, part of efforts to increase the market's role in directing credit and its effect on the economy.

 

Institutions that borrow at a floating rate and invest in assets that pay a fixed rate lose money when there is an increase in interest rates.

 

(Shanghai Daily January 28, 2008)