China will introduce credit-default swaps by the end of this year, according to Shi Wenchao, secretary general of the state-backed National Association of Financial Market Institutional Investors.
Investors in the derivatives will be required to own the underlying risk, Shi said today in an interview with reporters in New York. China plans to limit the amount of leverage used in the contracts to avoid the kind of financial crisis faced in the U.S. two years ago, he said.
“We believe CDS is a neutral risk-management tool,” Shi said. “It is neither evil nor good.”
Private swaps complicated efforts to solve the credit crisis in the U.S. when regulators and market users couldn’t easily determine how interconnected banks had become through trading contracts.
China also expects to open its debt markets further to foreign companies, saying the prospects for their selling debt will gradually improve during the next 3 to 10 years to “extraordinarily great” from “promising,” Shi said.
NAFMII was formed by the People’s Bank of China, the country’s central bank, in 2007 to help develop over-the-counter financial markets, including bonds, loans, commercial paper, foreign-exchange and gold.