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China's Bad Credit 

October 17, 2016

Christopher Balding, Bloomberg View

There is good news when it comes to China’s scary and still-growing pile of debt: At least the government recognizes the problem. Its attempts to mitigate those risks, however, seem doomed to fall short.

The government’s recent decision to create a market for credit default swaps is a case in point. The idea, as elsewhere, is to give banks and investors a means of pricing and trading the risk of Chinese companies defaulting on their debts. The need is obvious: Official measures of non-performing loans are worsening, while unofficial estimates say their share may have reached anywhere from 8 percent to 20 percent. Anything that spreads that risk should improve financial stability.

Yet, as envisioned, this new CDS market is unlikely to do much to improve the situation. For one thing, all but the largest companies already have to purchase credit insurance when taking out loans from giant state banks. There’s no pricing differential on this insurance, of course. But for the new system to function effectively, the government would have to let markets freely set the price of credit risk.

China doesn’t exactly have a stellar record of allowing markets to set prices in any field, whether in stocks, real estate or currencies. Read more

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