China approved credit default swap trading in the country's interbankmarket for the first time in order to diversify credit risks, the South China Morning Post reported Sept.23.
The National Association of Financial Market InstitutionalInvestors, a unit of the People'sBank of China, said that the approval covers swaps tied to the debtof companies, countries or multinational agencies.
The first batch of credit default swaps may be underwrittenby insurers, bank-affiliated asset managers and companies that process bad debtfor banks, traders said.
The People's Bank of China wants to use default swaps as anadditional tool to help the government roll back its role as guarantor, thepublication reported. The government previously provided aid on debt,distorting the cost of capital, allowing many companies to remain in debt.
The move comes amid bond defaults in Chinese markets. Up to18 Chinese bonds missed payments in 2016, compared seven in 2015, according toBloomberg data.
China's government has previously signaled a willingness toallow Chinese corporations to default, and as such, hedging tools such ascredit default swaps will become more crucial to market stability, said KeithNoyes, regional director of the International Swaps and Derivative Association.