China will permit trading in interest rate forwards starting on November 1, the latest step towards making its financial markets more market-oriented. The People's Bank of China said on Monday that it would allow forward rate agreements so that investors would have more tools to hedge against fluctuations in interest rates.
In a statement on its Web site, the central bank said the forward rate agreements would also increase market stability and efficiency and improve the market's price discovery mechanism.
"The launch of forward rate agreements will not only make the range of derivative products richer, giving investors greater flexibility in choosing the proper risk management tools, but they will also provide effective hedging measures for existing interest rate derivatives," the central bank said in a statement.
It said the only two derivatives that investors can choose from at the moment are bond forwards and interest rate swaps. "It's clearly a deepening of the financial markets in China," said Glenn Maguire, chief Asia-Pacific economist for Societe Generale in Hong Kong. But he added: "I don't think it's signalling a radical departure from the incremental approach we've seen to financial market liberalisation at this stage."