Chinese Government Sets the Groundwork for a Credit Event, said to Approve CDS Trading Soon

It looks like China is having troubles with spreading the risk for the eventual failure of their fucked up banking system. It’s being reported by Bloomberg that the government is set to approve CDS trading for companies, citing immense demand by market players to mitigate risk. What many people are not aware of is that China already has a CDS like system in place, called CRM. It was created in 2010 and has failed to mitigate risk miserably.

Five years into its existence, the market for credit risk mitigation (CRM) instruments — the Chinese equivalent of credit-default swaps (CDS) — remains a barren wasteland. Taking into account China’s decade-long rapid credit expansion, as well as the surge in non-performing loans and the rise in corporate bond defaults in more recent years, the failure of CRM is particularly baffling.

Indeed, when it was launched in China in late 2010, it looked like a safe bet that CRM would become a popular hedging tool in the country’s multitrillion dollar credit sector, replicating the triumphant rise of CDS in the international market in the late 1990s. Instead, the market has remained stagnant, and recently — in an effort to solve this puzzle — many pundits and CRM architects have combed through institutional, market and analytical hindrances.

The CRM market’s real bottleneck, however, may well lie in its product design.

It’s interesting to see them capitulate and adopt the CDS system, after six years of obstinate failure. Perhaps they’re merely adopting a superior system that will permit institutions to properly hedge against credit defaults. Or, maybe they foresee a whirlwind of defaults coming soon, as evidenced by the record amount of NPLs, and desire to lessen the eventual Federal burden by letting CDS trading being asap.