Banks and insurers cleared to fix rate-hedging bond contracts as PBOC steps up monetary reforms The mainland central bank yesterday said it would allow trading of interbank bond forwards from the middle of next month, a move seen by analysts as an incremental but critical step in the liberalisation of its capital and currency markets. Forward contracts allow participants to trade bonds at the current market price for delivery at a specific date in the future. Analysts said the move would improve liquidity and enable banks, insurance companies and other players in the mainland bond market to hedge their interest-rate exposure, or seek to profit from their assessments on the direction interest rates would take. 'This is a hugely important step for a banking sector that is bond heavy and up until now has had no means of hedging the risks associated with future interest-rate moves,' said Stephen Green, a Beijing-based economist with Standard Chartered Bank, noting such hedging abilities were essential to a mature capital market. The regulations, which take effect from June 15, can also be seen as a modest step towards creating the financial architecture required for full convertibility of the yuan on the capital account. Analysts expect yesterday's announcement to be followed in the near future by regulations allowing onshore trading of currency forwards, which will enable domestic investors to hedge foreign-exchange exposure. 'Onshore interest rate and foreign-exchange forwards are not immediately necessary for a revaluation of the yuan, but they are needed for full convertibility,' said Liang Hong, a China economist with Goldman Sachs. The government was clearly accelerating the pace of monetary reform, Ms Liang said. She said she expected currency forwards to be announced at the same time the mainland went ahead with a widely anticipated revaluation of the yuan, which, in her view, could happen at any time. The reason was that currency forwards would immediately affect the yuan, she said. The existing non-deliverable yuan forwards, which can be only traded offshore, reflect a 5.2 per cent appreciation of the currency over the coming 12 months. In a statement, the People's Bank of China said the new rules would allow forward contracts on all treasury bonds and bills. The contracts can have a maturity of up to 365 days and can be traded by any entity with a licence to operate in the domestic cash market, including foreign banks and financial institutions with a qualified foreign institutional investor quota. 'There was a pressing need for an effective interest-rate risk management tool as deepening interest-rate reforms have revealed more interest-rate risks and more frequent bond price fluctuations,' the central bank said. According to analysts, some banks are already engaging in informal forward deals on the grey market. The new rules will formalise this trading with legally guaranteed contracts. 'Because of the likely influx of participants [as a result of making the trading legitimate], the move will likely serve to help build the yield curve, which is a necessary pre-condition for further interest-rate reform and/or freeing up the currency regime,' Mr Green explained. The State Administration of Foreign Exchange yesterday announced it would 'name and shame' enterprises that violated foreign exchange regulations. Offenders would be exposed in the mass media, it said. The scheme would be implemented in Liaoning and Hebei provinces and in Shenzhen, and in cases involving significant amounts of illegal funds, the state agency said in a statement on its website.