CHINA'S central bank said yesterday that it will allow forward rate agreements starting November 1 to help financial institutions hedge market risks and allow them to better price activities on the interbank market.

The introduction of another financial derivative to China's interbank market will also boost the role of the central bank's benchmark rates in stabilizing market activities, the People's Bank of China said in a statement on its Website.

"This new derivative will help stabilize the yuan rates in the money market," Qu Qing, a fixed-income analyst at Shenyin Wanguo Research and Consulting Co in Shanghai, told Bloomberg News. "Currently the money market rates are quite volatile: The seven-day repo rate can go very high when funds are needed for new shares subscription and drop a lot if there are no upcoming big stock sales."

The seven-day interbank repo rate declined about five percentage points to 1.999 percent yesterday in Shanghai, after reaching a record 7.03 percent on September 25. China Shenhua Energy Co raised 66.6 billion yuan (US$8.9 billion) in an initial public offering in Shanghai on September 26.

A forward rate agreement is a contract in which one party pays a fixed interest rate and receives a floating interest rate equal to a reference rate over a fixed period. Only the difference in the value of the payments changes hands at the end of the contract.

The forward rate contract should be based on benchmark market rates or benchmark interest rates issued by the central bank, the People's Bank said in yesterday's statement.

China wants to provide more hedging tools for banks and other financial institutions as it gradually liberalizes controls over exchange rate and interbank markets. China so far has introduced bond forwards and interest rate swaps on the interbank market, the central bank said.