Credit de­fault swap trad­ing ‘no threat to prop­erty mar­ket’

China Daily (USA) - - BUSINESS - By LI XIANG lix­i­ang@chi­nadaily.com.cn

Trad­ing in credit de­fault swaps is un­likely to trig­ger a sub­stan­tial cor­rec­tion in China’s prop­erty mar­ket, econ­o­mists said on Tues­day, say­ing that con­cerns that spec­u­la­tors would use credit de­fault to short the mar­ket were un­founded.

TheNa­tion­alAs­so­ci­a­tion of Fi­nan­cial Mar­ket In­sti­tu­tional In­vestors, a unit un­der the Peo­ple’s Bank of China, has ap­proved trad­ing in credit de­fault swaps, a fi­nan­cial swap agree­ment that al­lows buy­ers of CDS to be com­pen­sated by sellers in the event of a loan de­fault.

In­dus­try an­a­lysts said that the move un­der­scored the gov­ern­ment’s in­ten­tion to in­crease the use of mar­ket forces in ad­dress­ing China’s debt prob­lem in­stead of re­sort­ing to a gov­ern­ment bailout when credit de­faults take place.

But the ap­proval of credit de­fault swap trad­ing has gen­er­ated anx­i­ety in the mar­ket, with con­cerns that the con­tro­ver­sial fi­nan­cial tool could be used by spec­u­la­tors to short the coun­try’s red-hot prop­erty mar­ket.

Credit de­fault swaps were blamed for ig­nit­ing the melt­down of the cap­i­tal mar­ket in the United States dur­ing the fi­nan­cial cri­sis in 2008.

Strong mort­gage de­mand has driven up Chi­nese house­hold bor­row­ing, which ac­counted for about 70 per­cent of all newloans ex­tended by Chi­nese banks in Au­gust.

To­tal new loans grew to 948.7 bil­lion yuan ($142.27 bil­lion) in that month, more than dou­ble the amount in the pre­vi­ous month, ac­cord­ing to of­fi­cial data.

Zhao Yang, chief China econ­o­mist at No­mura Se­cu­ri­ties, said that the trad­ing in credit de­fault swaps was un­likely to cause great volatil­ity in the hous­ing mar­ket, which is more sen­si­tive to fac­tors such as mort­gage poli­cies and land sup­ply.

“The mar­ket has read too much into the trad­ing of credit de­fault swaps. It is a much needed fi­nan­cial tool that could help im­prove China’s credit mar­ket by al­low­ing mar­ket forces to have greater say in the pric­ing of cor­po­rate debt,” Zhao said.

Most econ­o­mists be­lieve that the trad­ing in credit de­fault swaps will meet the ris­ing de­mand by in­vestors in China to hedge credit risks amid the grow­ing like­li­hood of more missed pay­ments and credit de­faults by com­pa­nies amid the eco­nomic slow­down.

“At this stage, credit de­fault swaps can ac­tu­ally help banks man­age credit risks, and po­ten­tially in­crease banks’ ap­petite to lend be­cause credit risks are perceived to be lower with this in­stru­ment,” said Hong Hao, chief strate­gist at BOCOM In­ter­na­tional Hold­ings in Hong Kong.

Wang Han, an an­a­lyst at In­dus­trial Se­cu­ri­ties Co Ltd, said trad­ing in credit de­fault swaps could help pro­vide more liq­uid­ity in the fi­nan­cial mar­ket and al­low banks to spin off some risks in their cor­po­rate busi­ness.

PRO­VIDED TO CHINA DAILY

At­ten­dees visit the Twit­ter Inc ex­hi­bi­tion stand at the Dmexco dig­i­tal mar­ket­ing con­fer­ence in Cologne, Ger­many.

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