As credit default swaps (CDS) for many euro zone sovereigns have zoomed to ever new record highs this year, Chinese CDS too have been quietly creeping higher. Five-year CDS are around 135 bps today, meaning it costs $135,000 a year to insure exposure to $10 million of Chinese risk over a five-year period. According to this graphic from data provider Markit, they are up almost 45 basis points in the past six weeks. In fact they are double the levels seen a year ago.
That looks modest given some of the numbers in Europe. But worries over China, while not in
the same league as for the euro zone, are clearly growing, as many fear that the real scale of indebtedness and bad loans in the economy could be higher than anyone knows. Above all, investors have been fretting about a possible hard landing for the economy, with the government unable to control a growth slowdown.
The CDS rises have coincided with worsening economic data – state-owned companies’ profits have fallen 8.6 percent in the January-April period from year-ago levels while industrial production weakened sharply in April. Fixed asset investment – a key driver of the economy – has hit its lowest level in nearly a decade.
CDS fell slightly today after Premier Wen Jiabao called for more efforts to support growth. His comments also provided a mild boost to China’s stock markets. Gavan Nolan, Markit’s director for credit research, says Wen’s comments suggest growth is taking precedence over inflation in policymakers’ minds: