Chinese Securities Is Selling Credit Risk Mitigation Warrants for the First Time Since 2011

Don’t worry, you’re all gonna make a fortune after tomorrow’s Jackson Hole speeches.

Meanwhile back on planet earth, Chinese NPLs are becoming such an issue it’s creating huge demand for credit mitigation warrants, which is another term for CDS.

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 firms missed local bond 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.”

In few years hence, China’s debt to GDP will top 300%.