China to al­low credit de­fault swap trades

The Myanmar Times - - International Business -

CHINA has given the green light to con­tro­ver­sial credit de­fault swap trad­ing for the first time, sig­nalling that Bei­jing is will­ing to let in­debted com­pa­nies fail to stop eco­nomic slow­down.

In a coun­try where the gov­ern­ment usu­ally helps firms fac­ing prob­lems, the move will al­low the mar­ket to ab­sorb the shock of de­faults, which will hap­pen much more fre­quently.

China’s cen­tral bank has ap­proved “the mit­i­ga­tion of credit risks”, the Na­tional As­so­ci­a­tion of Fi­nan­cial Mar­ket In­sti­tu­tional In­vestors (NAFMII) said.

Credit de­fault swaps are a kind of in­sur­ance un­der­writ­ten by an in­vestor which guar­an­tee the re­pay­ment of bonds in case of de­fault.

They came in for heavy crit­i­cism in the West af­ter the 2008 fi­nan­cial cri­sis, ac­cused of be­ing a spec­u­la­tive tool that con­ceals the ex­tent of risk. The swaps were in­stru­men­tal in the fall of the US in­surer AIG.

How­ever, NAFMII has in­sisted the credit de­fault swaps “will per­fect risk-shar­ing mech­a­nisms”.

Bei­jing has said it will let the most in­debted com­pa­nies – es­pe­cially the so-called “zom­bie” firms that have long ceased to be prof­itable – go bank­rupt.

“CDS pric­ing can also re­flect which com­pa­nies the gov­ern­ment may be more will­ing to bail out,” Iris Pang, se­nior economist of Greater China at the bank in Hong Kong, told Bloomberg.

China has seen bad loans climb to 1.4 tril­lion yuan (US$210 bil­lion) in the first half of the year, the high­est in 11 years, ac­cord­ing to Bloomberg.

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