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Chinese Real Estate Developers and Credit Default Swaps: A Risk for Bond Investors

Most foreign bond investors who buy large Chinese real estate developers do not have CDS protection. (Bloomberg)

[Financial Channel/Comprehensive Report]China’s Credit Default Swap (CDS) is not booming. Despite this, there are still many investors who buy overseas bonds of Chinese real estate developers without the risk of CDS. Once the Chinese real estate is not protected by CDS, If a developer’s bonds default, creditors may suffer a severe blow and it will also exacerbate the difficulties of China’s real estate industry.

“Bloomberg” pointed out that credit default swaps (CDS) are securities that act as bankruptcy insurance. China’s CDS market is far inferior to that of economically developed countries. Many purchased Country Garden for US$10 billion (approximately NT$323.29 billion). Bond investors mostly buy without the risk of CDS.

“Bloomberg” quoted data from the Deposit Trust and Clearing Corporation showing that the number of outstanding CDS of large companies that have defaulted recently, British film holding company Vue International reached US$62 million (approximately NT$2 billion), and Diamond Sports Group, which has filed for bankruptcy protection (Diamond Group) is US$77.4 million (approximately NT$2.5 billion), Rite Aid, one of the largest pharmacy chains in the United States, which filed for bankruptcy, is US$230 million (approximately NT$7.43 billion), French Card Casino Guichard-Perrachon is US$350 million (approximately NT$11.31 billion), while Country Garden is only US$26.5 million (approximately NT$850 million).

A “credit default swap”, also known as a credit default swap, is a financial agreement that enables a lender to “exchange” its exposure to another party. In order to receive the premium, the CDS seller assumes the credit risk of the lender, and if the borrower defaults, they will compensate the lender.

The report pointed out that earlier this year, when the French Casino Group defaulted on some bond coupons, creditors who purchased CDS linked to the debt successfully recovered 99% of their investment.

Carlos Casanova, senior economist at Union Bank of Hong Kong, said: “Debt restructuring in the real estate industry will inevitably lead to continued defaults.”

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2023-11-10 04:01:06
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