China has this week conducted its first credit default swap transactions, as the country addresses growing concerns over a slowing economy and depreciating yuan, Reuters
Fifteen credit default swap (CDS) transactions were conducted by 10 financial institutions on Monday, according to a Chinese bond supervisory body, which did not name the companies involved.
The transactions, which are the first of their kind in China’s interbank market, work as a kind of insurance for investors against bond defaults.
The total value of the transactions was 300 million yuan in nominal principle, the National Association of Financial Market Institutional Investors (NAFMII) said in a statement on its website.
Following extensive borrowing by Chinese companies post- the 2009 financial crisis, China’s debt load has rocketed.
Corporate borrowings now stand at $18 trillion or 169% of GDP, it has been reported.
“Tools like CDS and IRS (interest rate swaps) are important to development of capital markets in general and fixed income in particular. It is critical to driving bond market liquidity and it is a welcome development,” Mark Austen, Hong Kong-based CEO of ASIFMA, a securities industry body, told Reuters.
The lesson to learn from the experience of international markets is not to have derivatives markets overly complicated with the use of complex products, Austen added.
Despite cautiously permitting some bond issuers to default since 2014, doubts remain as to how far the government is really willing to go when so many companies are state-linked and when policymakers are highly sensitive to the risk of financial instability, the report said.
Ying Wang, Fitch’s senior director based in Shanghai, told Reuters
that the trading probably did not reflect worries about underlying creditworthiness of the firms.
“This is more likely to be a test of the new CDS scheme rather than concerns over (specific) credit risk. SOEs are usually the first batch of candidates to participate in new regulatory tools,” he said.
Analysts said widespread pricing distortions in China’s bond market mean risk premiums between higher and lower rated corporate bonds are narrow, which in turn makes it difficult to effectively price CDS.
As the pace of defaults have slowed, so too has the credit differentiation in China’s $7.5 million bond market.
Goldman Sachs estimated there was only one default in the domestic Chinese bond market in the third quarter, compared with at least 10 in the first half of the year, the report said.
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