China Plans Credit Derivatives Soon to Limit Bond Risk, Investor Body Says

China plans to introduce credit derivatives soon to control risks in the nation’s growing domestic bond market, according to the National Association of Financial Market Institutional Investors.

“We will make this a true risk-hedging instrument for the growth of the financial market,” unlike how the derivatives were used during the financial crisis, Shi Wenchao, secretary- general of the government-backed body, said at a briefing in Beijing today.

China is working with the International Swaps and Derivatives Association, said Shi, whose group monitors the country’s inter-bank market and promotes innovation in financial products.

Chinese bond sales surged to 1.96 trillion yuan ($288 billion) last year from 981 billion yuan as the government urged companies to reduce reliance on bank loans, according to data compiled by Bloomberg. U.S. and European regulators are reviewing ways to tighten oversight of derivatives, which have been blamed for exacerbating the global financial crisis.

Derivatives are financial instruments derived from stocks, bonds, loans, currencies or commodities, or linked to specific events such as changes in interest rates. Shi’s association held a conference on derivatives in Beijing on June 2. China will only introduce derivatives on bonds for now, Shi said.

Treasury bonds, central bank bills and policy bank bonds made up 78 percent of bond issuance in China last year, according to the website of Chinabond, the nation’s largest debt clearing house.

In the first quarter, 346 billion yuan of corporate bonds, medium-term notes, and financing bills were issued, compared with 317 billion yuan in the same quarter last year, according to China Lianhe Credit Rating Co.

To contact the reporter on this story: Henry Sanderson in Beijing at hsanderson@bloomberg.net

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