A Chinese financial committee has proposed new rules for hedging defaults, sources said Thursday.
China will move closer to launching credit-default swaps (CDS) under the recommendations, which were made by the financial derivative committee under the State-controlled National Association of Financial Market Institutional Investors (NAFMII), the sources said.
The committee met recently to amend rules governing the rarely used credit risk mitigation market, the only bond default hedging tool in China at present, the sources with direct knowledge of the matter told Reuters.
"The government has now made it very clear that everyone won't be bailed out," said Saifeng Mao, associate director at Fitch Ratings in Hong Kong.
"This is helping prepare the market for more defaults and allowing market forces to play a stronger role in pricing. A few months ago, corporate spreads were very compressed, meaning the market didn't really know how to price a lot of bonds, and that's looking better now."
The proposed new rules include guidelines for trading CDS and credit-linked notes, a signal that these products will be offered in China for the first time, the sources said.
They will need approval from the executive conference of the NAFMII, which is entrusted by China's central bank to supervise corporate debt issues.
For years, China's now $7.5 trillion bond market has worked on the assumption that the government would not allow a default.
