China is moving closer to its own version of a popular hedging tool that protects investors in case of defaults.
It comes as the world’s No. 2 economy struggles to cope with slowing growth and record numbers of companies not paying back debt, the Wall Stret Journal reports.
The National Association of Financial Market Institutional Investors (NAMFII), an industry body backed by China’s central bank, has consulted major banks and brokerages about the planned rollout of credit default swaps (CDS).
The swaps would pay out if the issuer of a bond or a loan defaults.
The regulator, which oversees China’s US$8.5 trillion interbank bond market, has drafted guidelines and standardized contracts for the product, one that has in the past two decades become a key tool in global markets to hedge government and corporate debt, the people said.
NAMFII has hired lawyers to help align its CDS rules with internationally accepted practices and is expected to ask the People’s Bank of China for formal approval to launch the market soon, one of the people said.
The planned rollout of rules for CDS reflects the pressures China faces as it tries to attract more investors, including global players, to a swelling bond market, even as debt defaults soar.
China’s domestic bond market has had 39 defaults totaling around 25 billion yuan (US$3.8 billion) this year, already exceeding the total of 20 defaults worth 12 billion yuan for all of last year.
In 2014, there were five such defaults, following one in 2013.
“If the [CDS plan] is carried out well in China, it will certainly be a big help to investors,” said Wang Ming, a partner at Shanghai Yaozhi Asset Management Co., a bond fund that manages two billion yuan in assets.
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