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Credit Default Swaps Get Green Light in China 

September 26, 2016

Shen Hong, Wall Street Journal

China has given the go-ahead to the use of financial products that can protect investors against bond or loan defaults, signaling an increased willingness to let market forces deal with the rising number of companies that are not paying back debt.

The move means that Chinese investors will for the first time be able to buy products such as credit default swaps, known as CDS, which became controversial in the West during the global financial crisis because of the way in which their extensive use can build up hidden financial risks.

The National Association of Financial Market Institutional Investors, an industry body backed by China’s central bank, announced the rollout of four different types of so-called “credit risk mitigation tools” and released guidelines for each of them Friday. The Wall Street Journal reported last month that the Chinese authorities were considering the move.

Chinese regulators are hoping that products like CDS, which pay out if the issuer of a bond or a loan defaults, will become popular among investors in the country’s main $8.5 trillion bond market. In turn, that could lower the burden on Beijing to bail companies that get into financial difficulty. Read more

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