China banks launch RMB interest rate swap

The People’s Bank of China (PBOC) has started giving out approvals on a deal-by-deal basis for renminbi-denominated interest rate swaps, with the Bank of China the first to arrange a transaction for a client, while another transaction between China Everbright Bank (CEB) and China Development Bank (CDB) is awaiting government approval.

In late-September, the Bank of China reportedly entered into the country’s first RMB interest swap with the Ministry of Railways. On October 12, local newspaper Shenzhen Daily reported that CEB and CDB entered into the first interbank RMB interest rate swap, based on a notional principal of RMB5 billion ($617 million). The swap, which was pending government approval as of 12 October, involves CEB paying a fixed rate of 2.95% for 10 years to CDB. The latter will pay a floating rate referenced to the one-year deposit rate set by the People’s Bank of China (PBOC). The one-year deposit rate is currently 2.25%.

Bankers also expect the PBOC to start awarding licenses soon for other banks to conduct interest rate swaps in RMB. An interest rate derivatives specialist at a foreign investment bank in Hong Kong tells RiskNews: “We’re still waiting for the approval, and we’re very close to being able to do something. But we haven’t actually got the license yet.”

“Currently it’s on a deal-by-deal basis. So if we have a deal, we can try to get it approved by the central bank,” the banker adds.

Ralph Liu, chief investment officer of China Everbright Bank, was quoted by the Shenzhen Daily as saying: “This afternoon, we have agreed with the China Development Bank to enter into a RMB-denominated interest rate swap for RMB5 billion. We are the fixed payer, they are the receiver, we are counterparties to each other."

The report did not specify reasons for entering into the swap, but it is believed that CEB requires the swap to hedge the risk from a pilot fixed-rate five-year housing loan that the bank is preparing to launch in Shanghai and Beijing later this year.