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Christopher Balding

China's Bad Credit

Unless the government starts letting the market price risk properly, debt will continue to grow.
Credit default swaps aren't the answer.

Credit default swaps aren't the answer.

Photographer: Frederic J. Brown/AFP/Getty Images

There is good news when it comes to China’s scary and still-growing pile of debt: At least the government recognizes the problem. Its attempts to mitigate those risks, however, seem doomed to fall short.

The government’s recent decision to create a market for credit default swaps is a case in point. The idea, as elsewhere, is to give banks and investors a means of pricing and trading the risk of Chinese companies defaulting on their debts. The need is obvious: Official measures of non-performing loans are worsening, while unofficial estimates say their share may have reached anywhere from 8 percent to 20 percent. Anything that spreads that risk should improve financial stability.