China CDS trading booms

viernes 18 de julio de 2014 07:30 GYT

* CDS net notional double on back of China fears

* PIMCO a major liquidity provider on the contract

* Concern over default protection persists

By Christopher Whittall and Eric Burroughs

LONDON, July 18 (IFR) - Trading in China sovereign credit default swaps has more than doubled in the past year as fears over slowing growth and rising corporate defaults in the world's second largest economy have helped transform the contract into the go-to Asia hedge for macro investors.

The net notional outstanding in China CDS now stands at US$14.1bn according to the DTCC - a leap of 109% compared to a year ago. The country is now the third largest single-name CDS contract in the world by net notional, despite having only a handful of small outstanding bond issues. Chart

China's lack of external debt has led some investors to dismiss the CDS as a purely speculative instrument, highlighting that it is unlikely to provide any default protection.

But this has not prevented the contract from building a critical mass of liquidity, as global managers such as bond behemoth PIMCO have become more active in the contract amid rising fears over an economic slowdown, property bubble and the country's shadow banking system.

"As China became the main cause of concern for global growth at the start of the year, we have seen a lot more macro accounts get involved in China CDS as a cheap and efficient way to hedge their cross-asset exposure," said Salih Unsal, a Hong Kong-based credit trader at Citigroup.   Continuación...