Monday, November 08, 2010

China does many good things and this is one of them

My readers know that I can be very caustic in my comments, and that I have more than once taken the Chinese regime to task. If I do deliver brickbats to those I think deserve them, I am very happy to deliver bouquets where those are deserved - and China deserves a bouquet for the following:

A few days ago, China started trading the first Renminbi-denominated credit-default swaps, though it had announced as long ago as September last year that it was going to start doing so.

What China has done right this time is not so much to start doing what it said it was going to do (though that is of course a good think!) but the following:

I understand that the contracts, apparently regulated by China's Central Bank and traded through the Shanghai interbank clearing system, may only be sold to investors in possession of the corresponding underlying assets. In other words, they cannot be used for what I call speculation (where the speculator does not hold the underlying assets, but is only interested in gambling on whether or not the value of the assets is going to go up or down).

Moreover, these contracts cannot be used to insure high-risk securities - another way in which capital enters the speculative frenzy.

Finally, the contracts may not exceed five times the value of the underlying debt. I would have preferred the limitation to be only twice or thrice the value, but the rule that the Chinese have put in place is bolder (stricter) than many other countries that either allow unlimited leverage or allow a significantly higher multiple.

Bravo, China! Sphere: Related Content

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