China will start interest rate forward trading from November 1, the central bank announced yesterday.

The launch of the forward rate agreement, as the central bank calls it, is a step forward to further liberalize the country's interest rates.

The agreement is a cash-settled forward contract between two parties on a short-term loan. It does not involve real transfer of principal and is settled according to the profit or loss resulting from the difference in the agreed rate and the benchmark market rate at maturity.

The new product would ensure that investors have more tools to hedge against interest rate risks, the People's Bank of China said in a statement.

It would also increase market stability and efficiency, improve the market's price discovery ability, and enrich the financial derivatives market, the central bank said.

The only two derivatives available now are bond forwards and interest rate swaps.

"Investors would become more flexible in choosing products that most suit them," the statement said.

"It will help investors pre-set the interest rates at a level acceptable to them, thus fixing risks," said Li Yongsen, an economist with Renmin University of China.

(China Daily October 9, 2007)