Thursday, November 4, 2010

China Rising: Sophisticated Finance

Bloomberg News is reporting today, Thursday, Nov 5th, that China intends to start trading yuan denominated credit default swaps as it begins to experiment with these instruments for a national audience. These instruments will be known as “credit risk mitigation tools” and will be regulated and guaranteed by the Central Bank of China.

President Hu Jintao Of China

Regulators will limit leverage and monitor speculation to avoid a “bubble” in the market for these securities by institutional investors. Published guidelines must be followed that will eliminate using these credit swaps to insure high risk securities: something the US and Europe failed to do and for which they are currently paying the price.
This is another important development in the sophistication of the Chinese banking system and another step toward the globalization of the Chinese currency. Earlier this year China moved to establish a local gold storage and exchange, and also has moved to conduct foreign trade with some nations using their respective currencies; another move to get away from the US dollar as its primary source of foreign exchange.
The Chinese studied capitalism for many decades with a large contingency of financial personnel in the City of London and has moved deliberately and intelligently as it has transformed its economy into a market oriented machine, driven by a single purpose, intent, and guiding hand: become the largest and most stable economy in the world to match its status as the most populated.
After all “Wealth is glorious!”

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