* Inaugural batch of CDS contracts worth 300 mln yuan
* Credit differentiation has reduced since the start of the
* CDS launch amid soaring debt load in China
(Adds context, details, quotes)
HONG KONG/BEIJING, Nov 1 China launched this
week its first credit default swaps, a kind of insurance for
investors against bond defaults, marking another step in
Beijing's efforts to address the country's growing debt risks.
Ten financial institutions conducted 15 credit default swap
(CDS) transactions on Oct. 31, the first such transactions in
China's interbank market, a Chinese bond supervisory body said
The 15 transactions totalled 300 million yuan ($44.28
million) in nominal principal, the National Association of
Financial Market Institutional Investors (NAFMII) said in a
statement on its website.
"Tools like CDS and IRS (interest rate swaps) are important
to development of capital markets in general and fixed income in
particular. It is critical to driving bond market liquidity and
it is a welcome development," said Mark Austen, Hong Kong-based
CEO of ASIFMA, a securities industry body.
Austen said the lesson to learn from the experience of
international markets is not to have derivatives markets overly
complicated with the use of complex products.
"They should make the products easy to understand and avoid
situations like in the financial crisis where many did not even
know the level of their exposure to Lehman Brothers."
China's debt load has soared since the 2008/09 global
financial crisis as companies borrowed heavily to sustain
growth. As a result, corporate borrowings are now $18 trillion
or 169 percent of GDP.
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.
NAFMII did not name the companies for which CDSs were traded
Ying Wang, Fitch's senior director based in Shanghai, said
the trading probably did not reflect worries about underlying
creditworthiness of the firms.
"This is more likely to be a test of the new CDS scheme
rather than concerns over (specific) credit risk. SOEs are
usually the first batch of candidates to participate in new
regulatory tools," Wang said.
Widespread pricing distortions in China's bond market mean
risk premiums between higher- and lower-rated corporate bonds
are narrow, which in turn makes it difficult to effectively
price CDS, analysts said.
Credit differentiation in China's $7.5 trillion bond market
has diminished as the pace of defaults has slowed. Goldman Sachs
estimated there was only one default in the domestic Chinese
bond market in the third quarter, compared with at least 10 in
the first half of the year.
This view was already reflected in the market. Since the
pace of defaults has slowed, the yield gap between the AAA-rated
5-year corporate bond benchmark and the AA-rated
comparable has dropped to 40 basis points (bps) from
over 70 bps in mid-2016.
($1 = 6.7754 Chinese yuan)
(Reporting by Beijing Monitoring Desk and Umesh Desai in HONG
KONG; Writing by John Ruwitch; Editing by Jacqueline Wong)