China to allow market more say in cost of capital

The People's Bank of China (PBOC) is to introduce the trading of interest rate forwards in what is seen as an important step in allowing market forces to determine the cost of capital, the South China Morning Post reported. According to the PBOC statement made on Monday, interest rate forwards trading will begin on November 1. In this kind of forward contract, investors and borrowers agree on the interest rate on a loan in advance for a specified period. The rates set by the two parties must be based on benchmark rates set by the central bank or the benchmark rate used on the interbank market. The PBOC said the introduction of market-based rates could "help ward off risks in short-term loans." Analysts said the move signals Beijing's intention to fully liberalize borrowing costs and that full deregulation was not far off. Derivative products already available on the mainland include bond forwards and interest-rate swaps.