SHANGHAI, July 10 -- CHINA will allow trust companies, insurers and financial leasing firms to borrow from each other for the first time as it further develops the interbank lending market which saw a 10-fold surge in transactions over the past decade.

Besides the above, auto financing companies, financial asset management firms and insurance asset management units will also be allowed in the interbank market from August 6, the People's Bank of China said in a statement yesterday.

"Letting more institutions join in the market will help diversify the scope of participants, boost trading volume and introduce a market-based mechanism to develop a multi-layer industry," said the central bank.

China set up the interbank lending market in 1996 and by the end of last year, it had 703 members - including domestic and foreign banks as well as securities firms - 14 times the number when the market started. Trading totaled 2.15 trillion yuan (US$282.8 billion) last year.

"The new policy provides these companies with a channel to hedge against risks," said Wu Yonggang, an analyst at Guotai Jun'an Securities Co.

The new regulation also defined a lending period for these institutions. Banks can borrow for as long as a year while financial leasing firms, financial asset management firms, auto financing units and insurers may borrow for up to three months. The lending limit is seven days for brokerages, trust companies and insurance asset management units, the statement said.

"From the government perspective, a broad and more active interbank market gives it a clear picture about the actual liquidity status in the country," said Wu.

The central bank in January introduced a new benchmark rate between lenders, known as the Shanghai interbank offered rate, or Shibor, to promote market-based interest rates, foster China's money-market base interest rate and improve financial institutions' pricing ability.

It also plans to actively push forward the development of other markets, including short-term bills, bond repurchase, interest-rate swaps as well as constantly innovating financial products to meet the needs of diversified investors, the statement said.