China has taken another step towards opening a credit default swap (CDS) market, the Financial Times reports this morning. The hedging tools would protect investors in case of a credit default.

CDSs to be approved 'in coming months'

While the possibility of introducing a CDS market in China has been discussed since 2010, when the credit-risk-mitigation agreement (CRMA) was introduced, the People's Bank of China is now likely to approve the scheme “in the coming months”, according to the FT. 

The CDS market would allow participants to buy and sell credit insurance to protect and hedge against a Chinese company default, writes the FT. The move follows a rise in bond defaults in the country, with 41 companies defaulting on Rmb25.4bn ($3.8bn) worth of bonds since the beginning of 2016. Furthermore, credit quality is deteriorating, with more than 1,000 downgrades recorded in the past two months in China.

Reaction to weakening economy

The move towards a CDS market, also reported in the Wall Street Journal earlier this month, comes as the National Association of Financial Market Institutional Investors, an industry body backed by China’s central bank, carried out talks with banks and brokerage firms about the potential introduction. The association has already drafted guidelines and standard contracts for the hedging products, which are said to be in line with International Swaps and Derivatives Association standards.

The PBoC's likely acceptance of CDSs is seen as a sign of the government's reaction to the country's weakening economy and increased fiscal strains.

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CTMfile take: This move should boost confidence for all investors in China.