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China Starts Credit-Default Swap Trading as Bond Failures Spread 

November 1, 2016

Bloomberg News, Bloomberg

Faced with mounting bond failures, China has started trading of credit-default swaps on the nation’s interbank market. Trading began Monday, according to a statement on the website of the National Association of Financial Market Institutional Investors, a unit under the nation’s central bank. Industrial Bank Co. and Bank of China Ltd. were among the institutions to conduct transactions, using China United Network Communications Ltd.’s bonds as underlying debt, said a person familiar with the matter, asking not to be identified because the authorities haven’t disclosed the information.

The swaps, which provide insurance against nonpayment on bonds, can help investors hedge against credit risks after 21 securities defaulted this year, compared with only seven in 2015. There is room for failures to rise after Premier Li Keqiang pledged to weed out zombie companies even after the economy grew at the lowest pace in a quarter century. The start of trading comes after people close to the matter said in September that the People’s Bank of China had approved CDS trading by financial institutions on the interbank market.

“CDS can help investors to hedge risks, but currently the issuers are mainly large institutions and it’s hard to expand, because the market trusts the big ones," said David Qu, Shanghai-based markets economist at Australia & New Zealand Banking Group Ltd. “The market has just kicked off, so both issuers and investors are cautious." Read more

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