China starts its first Credit-Default Swap trading, which provides a kind of insurance for investors against bond defaults. The principals of the first CDS trading in China are Industrial Bank and Bank of China, which conduct transactions, using China United Network Communications’ bonds, as underlying debt.
The swaps, which provide insurance against nonpayment on bonds, can help investors to hedge funds against the credit risks after 21 securities defaulted this year. According to the investors and analysts, the market has just kicked off, so both issuers and investors are cautious.
On the first day of CDS trading, ten financial institutions conducted 15 credit default swap (CDS) transactions, the first such transactions in China’s interbank market. The 15 transactions totaled at 300 million CNY (44 million USD) in nominal principal.
The government has cautiously allowed some bond issuers to default since 2014, although doubts remain about 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.