China Plans Change to Opening-Price Mechanism of Money Rates

The People’s Bank of China plans to change the way it compiles the opening prices of benchmark money-market rates to help prevent manipulation, according to two people with knowledge of the matter.

The National Interbank Funding Center will ask 50 institutions to submit quotes anonymously for overnight and seven-day repurchase agreements from 9 a.m. in Shanghai, and use these to derive an opening level published at 9:30 a.m., according to a proposal outlined in a document sent to market participants. The center, a unit of the central bank, did not give a timeframe for the proposed change, the people said. Currently, the level is the first trade recorded each day.

“The problem with the existing system is that the opening price can be determined by as few as two banks,” said Chen Peng, a fixed-income analyst at Fortune Securities Co. in Shenzhen, Guangdong province. “Because most of the following bids and asks treat the opening price as the reference rate, it can induce manipulation.”

China is loosening controls on borrowing costs to give market-determined interest rates a greater role in pricing risk. The seven-day repo or the Shanghai Interbank Offered Rate can become the nation’s new benchmark rate, PBOC Deputy Governor Yi Gang was cited as saying in a Nov. 26 report by the official Xinhua News Agency. Goldman Sachs Group Inc. has designated the seven-day repo its key barometer and stopped making forecasts for the central bank’s official lending and deposit rates, which were last adjusted in July 2012.

Rate Reform

Policy makers removed last year a floor on the lending rates banks can charge to borrowers, and PBOC’s Yi said deposit-rate reform will be the focus this year and next, Caixin magazine reported on its website on March 22.

The seven-day repo rate, a gauge of funding availability in the interbank market, rose 24 basis points, or 0.24 percentage point, today to 3.88 percent as of 12:19 p.m. in Shanghai, according to a weighted average compiled by the National Interbank Funding Center. The overnight rate increased two basis points to 2.52 percent. The first transactions recorded today were at 3.60 percent and 2.50 percent, respectively.

The minimum amount for institutions’ quotes to be counted toward the setting of the opening level would be 100 million yuan ($16.1 million) and the maximum 500 million yuan, according to the document. A press officer at the National Interbank Funding Center declined to comment on the plan.

Better Indicators

The proposed changes to the setting of the opening levels are “going to help the indicators better reflect the real liquidity situation,” said Li Haitao, a Shanghai-based bond analyst at China Guangfa Bank Co. “The seven-day repo, in particular, is the underlying rate for a lot of transactions and derivatives, so it’s not desirable for regulators to see it distorted because of thin trading.”

In the domestic foreign-exchange market, China should set the yuan’s closing price as the next day’s opening price, China Securities Journal reported today, citing Chen Bingcai, a former official with State Administration of Foreign Exchange and a researcher with the Chinese Academy of Governance.

— With assistance by Helen Sun, and Laura Yin

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