Newly launched credit default swaps in China's interbank bond market will benefit asset managers, improve liquidity and help the market meet global standards, says a ratings agency.
The instruments, which began trading on October 31, come in a year of record bond issuance, according to the report by Moody's.
"China's introduction of credit default swaps on the interbank market is credit positive for asset managers, because it provides them with an alternative tool to hedge bond defaults at a time of rising defaults," says the agency in a statement.
The news follows the lowering, in February, of barriers to international investment in China's interbank bond market, which is estimated to be the world's third-largest after the US and Japan.
As yet, foreign participation in the Chinese interbank bond market is low, a result some attribute to China's exclusion from major global bond indices. However, with its value estimated at $7 trillion or more, the market is expected to attract more global investors in future.
Credit default swaps allow investors to insure against a borrower failing to repay its debts. Chinese credit default swaps must refer to a specific debt instrument – a restriction designed to prevent speculation, according to Moody's – and no secondary trading is allowed.
There were 14 Chinese institutions registered to deal in credit default swaps when the new instruments began trading on October 31.
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