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Two Chinese banks have signed an agreement to swap yuan interest rates, grabbing the limelight ahead of expected government approval for launching such derivatives, bank officials said on October 12.
An interest rate swap allows two companies or banks to hedge their exposure to changes in interest rates by exchanging one stream of interest income for another.
China Everbright Bank had agreed to exchange a 10-year fixed interest rate with China Development Bank for a floating rate based on a notional principal of 5 billion yuan ($620 million), said Liu Yemin, Everbright Bank's chief investment officer.
Under the deal, the fixed interest rate of 2.95 percent would be exchanged for a floating rate linking to the one-year yuan deposit rate, now at 2.25 percent, bank officials said.
The central bank said in August that China would launch interest rate derivatives as soon as possible, another move towards financial liberalisation after July's currency revaluation. But the government has yet to give a formal go-ahead.
Everbright Bank aimed to use the interest rate swap to hedge future risk as most its loans, such as mortgages, carry long-term fixed rates while most deposits were short-term, Liu said.
State media have said recently that Bank of China had entered an interest rate swap agreement with the Railway Ministry.

Copyright Reuters, 2005

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