China will introduce securities lending in its interbank bond market to boost development, the People's Bank of China said Monday.

The new rules, which will take effect on November 20, will allow banks to borrow or lend bonds for a maximum of 365 days, the central bank said in a statement on its website yesterday.

"Against the backdrop of the rapidly developing interbank bond market, the introduction of securities lending is of great significance," it said.

Allowing bond holders to lend securities they do not need would increase the volume of paper in the market, which in turn could bolster the liquidity, the central bank explained.

Low liquidity has long been a problem plaguing the interbank bond market, experts said.

The new rules, the central bank said, could also reduce price swings and improve the efficiency of the market.

They would also promote smooth clearing, contributing to the stable running of the market.

Short-selling, a mechanism under which investors could sell out securities that they currently do not own, would provide new profit generating venues and a risk-hedging tool for investors, the central bank said.

The new rules would also allow market-makers to hold less inventory, reducing their risk exposure.

Outstanding bonds on the interbank market amounted to 8.9 trillion yuan (US$1.1 trillion) at the end of September, figures from the China Government Securities Depository Trust and Clearing Co Ltd show.

"The central bank will continue to push forward both system and product innovation in a bid to spur the bond market to develop in a rapid, healthy and sustainable way," it said.

But it will do so under its overall planning of the development of the bond market and take into consideration market responses, it said.

In another development, China has banned domestic banks from trading in offshore yuan derivatives, the foreign exchange regulator said in a notice posted on its website.

However, the State Administration of Foreign Exchange (SAFE) said it would encourage banks, companies and individuals to hedge foreign exchange risks by making it simpler to use domestic yuan swaps and forwards.

It did not spell out details of the process. "The onshore derivatives market is still in its infancy in China; and the current focus on foreign exchange transaction should put in place risks prevention; and the speculative transactions of derivative trading should be discouraged," the SAFE said.

(China Daily November 7, 2006)