China Reviving Default Hedging Tool Shows Credit-Risk Concerns

  • Broker to sell first credit-risk mitigation warrants since ’11
  • SWS Research says regulators also pushing credit-default swaps

The revival of a default hedging tool not used in China since 2011 reflects rising concerns over credit risk after bond delinquencies surged.

The National Association of Financial Market Institutional Investors said in an Aug. 17 statement that it had allowed China Securities Co. to sell credit-risk mitigation warrants, a Chinese version of credit-default swaps. The contracts’ underlying assets will be the senior tranche of Agricultural Bank of China Ltd.’s non-performing-loan-backed securities, NAFMII said. The products, which must be written on specific underlying debt, were introduced in 2010 and none have been sold since 2011.

Chinese investors have called for tools to hedge credit risks after at least 18 local bonds missed payments this year, compared with seven for the whole of 2015. NAFMII was considering starting trading of new versions of CDS products and held a meeting in Beijing in May at which some market participants voted to pass proposed rules, people familiar with the matter said around that time.

“Credit risks are much higher than before,” said Chen Kang, a bond analyst at SWS Research Co. in Shanghai. “Both regulators and market participants are actively pushing for the new CDS to be launched.”