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China launches new government bond yield curve benchmark

[SHANGHAI] China has introduced a new benchmark for government bond yields, creating an official point of reference for the country's underdeveloped debt markets and marking a fresh step in efforts to encourage accurate risk pricing.

The Shanghai Key Yield (SKY), published by China's primary state-owned bond clearing house, tracks maturities of government bonds from three months to 10 years, and is taken from the clearing house's daily government bond yield curve, ChinaBond Pricing Center, a subsidiary of China Central Depository & Clearing Co (CCDC), said in a statement on Monday.

The first quoted three-month SKY on Monday evening was 3.9285 per cent, and the 10-year rate was 3.8902 per cent.

The statement said that the introduction of SKY would "(bring) into full play the role of the government bond yield curve as a pricing benchmark". Chinese government bond yields reached three-year highs in late November as a government push to crack down on risky financing sparked a bond selloff.

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The International Monetary Fund will use the three-month SKY rate to represent yuan interest rates in calculating interest rates on special drawing rights (SDR), the statement said.

The 10-year SKY rate will be used as the benchmark in 10-year local government bonds, and will be displayed on the websites of the central bank and finance ministry.

China has been attempting to encourage its financial markets to more accurately price risk as a key part of its deleveraging drive, recently introducing new rules for the asset management industry and cracking down on micro loans, as well as allowing more companies to default or pursue debt-for-equity swaps.

In July, the People's Bank of China published rules allowing foreign rating agencies to establish wholly owned businesses on the mainland to assess the credit risks of domestic bonds.

The introduction of the Shanghai Key Yield is "not a game-changer", but it fits into initiatives to promote and disseminate Chinese pricing benchmarks globally, said Louis Kuijs, head of Asia Economics at Oxford Economics in Hong Kong.

While questioning the usefulness of an indicator reflecting existing information, Gary Ng, an economist at Natixis in Hong Kong, said that SKY's introduction may help the market to refocus on a single benchmark.

That could help to reduce volatility and stabilise yields in China's bond market.

"Given the recent surge in onshore sovereign yields, we believe this could be in line with the main theme (of) exerting stronger state control and giving more guidance to the market,"said Mr Ng.


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