Credit Default Swaps Recommended by Chinese Regulator for Corporate Bonds

Over 10 years ago, credit default swaps (CDS) were the rage and ultimately the demise that would lead to the financial crisis in the United States. China may be entering that realm with the China Securities Regulatory Commission (CSRC) asking corporations to use credit default swaps for raising funds in order to issue new bonds.

“This guidance means that new issuance by private enterprises, new bonds will need to be matched (with CDS), regardless of the use of proceeds,” said a source close to the Shanghai Stock Exchange.

While ongoing trade negotiations between the U.S. and China have the capital markets eagerly anticipating a tangible trade deal, stimulus measures by the Chinese government to prop up the domestic economy are starting to take its effect.

A mix of Chinese stimulus measures have been providing the fodder for economic growth, such as lower taxes, no corporate tax breaks, monetary policy adjustments, and more market access for foreign companies to set up shop. All in all, Wall Street is looking at the Chinese government’s latest efforts as a plus for its economy and a boon for Chinese bonds.

Chinese bonds made their debut on the Bloomberg Barclays Global Aggregate Index earlier this month–a move that would give investors more access to China’s $13 trillion bond market. Markets analysts are expecting that this inclusion would garner a capital influx of $150 billion in foreign inflows.

Over the course of the next 20 months, these Chinese bonds will be added to the global index. Bonds that will be included in the index are the following:

  • Chinese government: 159
  • China Development Bank: 102
  • Agricultural Development Bank of China: 58
  • Export-Import Bank of China: 45

China Helping to Drive Global Growth

According to the IMF, the world economy will grow at a 3.3 percent pace, which is 0.2 percent lower versus the initial forecast in January. Nonetheless, strength in leading markets like the U.S. with its healthy labor market are keeping global growth afloat.

“The global picture is still fairly robust,” said Luke Oliver, Head of U.S. ETF Capital Markets for DWS during a media call.

Oliver also cited China as one of the primary reasons for sustaining global growth. Of course, it’s difficult to talk international investing to an investor without mentioning the world’s second largest economy.

“We all intuitively know that China will be the largest economy in the world–it’s not ‘will it be,’ it’s ‘when it will be,’” said Oliver.

In fact, China is becoming less resistant to safeguarding its businesses, which will open the pathways to more foreign investment.

“These fiscal measures that have been going in with these VAT (value-added tax) cuts, we think that’s increasing confidence in China so we definitely think there’s some good upside,” said Oliver.

Of course, Chinese equities will no doubt benefit the primary trigger event of a U.S.-China trade deal that’s still undergoing negotiations. While some analysts feel a trade deal is already priced into the markets, investors are hoping it could provide a surge for Chinese equities even further.

For more market trends, visit ETF Trends.