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China Issues Variable "DR"-Based Bonds in Rate Reform Push

China’s first bond with a variable interest rate tied to a key benchmark dubbed “DR” was issued on Friday, marking the latest step by the central bank to improve the pricing mechanism for financial markets.

China is joining other major economies in reforming its benchmark rate framework, as the London Interbank Offered Rate (Libor), once the most widely used global benchmark, is being phased out.

The People’s Bank of China (PBOC) said in August that it will make Depository-Institutions Repo Rate, or DR, a key reference for monetary policy adjustment and market price-setting.

On Friday morning, the Export-Import Bank of China, a policy bank, auctioned a 3-billion-yuan ($458.94 million) bond with floating rates pegged to seven-day DR. Rate of the six-month bond was set at 2.6%, 44 basis points above the benchmark, traders said.

Analysts say such products would help improve China’s benchmark interest rate system, and facilitate monetary policy transmission.

Floating-rate bonds could also help investors and issuers avert risks from volatility in interest rates, but such instruments account for just 1% of China’s bond market, mostly using Shibor as benchmark, according to official data.

Shibor, or Shanghai Interbank Offered Rate, is calculated using banks’ price quotations. However, DR is based on daily repo trading averaging 1.8 trillion yuan, and is the most recognized “barometer” of China’s banking system liquidity, the PBOC said in August.

In addition to floating-rate bonds, PBOC is also encouraging financial institutions in China to use DR as a reference to price other products, such as interest rate swaps and negotiable certificate of deposits (NCDs).

Last week, China’s interbank market platform rolled out value calculation services for interest rate swaps based on DR, and also started charting yield curves for such derivatives.

($1 = 6.5337 Chinese yuan renminbi)

(Reporting by Samuel Shen and Andrew Galbraith; Additional reporting by Hou Xiangming and Li Hongwei; Editing by Kim Coghill)

Source: Reuters


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