China to roll out credit-default swaps to protect investors. (Photo : Getty Images)
China is inching closer to implementing credit-default swaps (CDS) that could protect investors from defaults as the state interbank market bonds regulator seek the opinions of brokerage firms and financial banks on the matter.
According to the Wall Street Journal, the National Association of Financial Market Institutional Investors (NAMFII) has convened several major banks and brokerage companies about their plans to roll out the CDS.
This led the WSJ to believe that the second largest economy in the world is far from recovering from its economic slowdown in recent years.
Credit-default Swaps
According to the outlet, CD swaps is China's version of the famous Western hedging tool used to minimize loss for investors should the company they invested in defaults.
The NAMFII which serves as the manager of the $8.5 trillion interbank bond market of the country has hired legal experts to help draft and align the rules and regulations related to the planned CDS rollout.
The regulator first acknowledged the need for CDS in March as reported by Bloomberg in April. Citing unnamed sources, the outlet noted how the NAMFII gathered data on the hedging tool that could prove to be beneficial for China.
"There has always been demand for CDS, but there are many concrete problems to solve. For example, investors would have small demand for issuers with low credit risks and big demand for issuers with high credit risks, which will lead to structural imbalance," said Zhao Hengyi of the Shanghai-based HFT Investment Management Co.
What It Means for the Chinese Economy
It is no secret that China is struggling to get back on its feet after the dwindling GDP and extensive debt crisis for the past years and the WSJ is positive that needing the CDS is another proof that the nation is far from better.
In fact, the Chinese domestic bond market already had 39 defaults amounting to as much as 25 billion yuan or $3.8 billion which is significantly higher than last year's 12 billion yuan-worth defaults.
Two years prior to 2016, the country was faring better with only five and one defaults in 2014 and 2013, respectively.
Fortunately, the roll-out of the planned CDS is timely and could definitely be a huge help for troubled investors in China.
"If the [CDS plan] is carried out well in China, it will certainly be a big help to investors," Shanghai Yaozhi Asset Management Co. partner Wang Ming told WSJ.
