China’s CDS jumps as fears of contagion grow

China’s CDS jumps as fears of contagion grow

China’s sovereign credit defaults swaps (CDS) soared to a one-year high on Monday, as risk aversion is very much on the menu.

A CDS contract involves the transfer of credit risk of municipal bonds, emerging market bonds, mortgage-backed securities, or corporate debt between two parties. It works in a similar way to insurance in that the buyer of the contract, who often owns the underlying credit, receives protection against default or another negative ‘credit event’.

China’s CDS jumped nine basis points from last week’s close, according to data, and is now at its highest point since October. It means that the cost of insuring China against a default is at a one-year high.

Therefore investors are suggesting that the situation is a systemic contagion for the Chinese economy.

Shares in Evergrande hit a ten-year low, while property stocks in Hong Kong also took a beating.

The CDS for other major economies rose too, including Brazil and Turkey, giving an indication of the global nature of present concerns.

Emerging market bonds also dived on Monday, along with stocks and currencies.

"As of right now, I don't see any systemic risk for the global economy from the Evergrande situation," said David Bahnsen, chief investment officer at The Bahnsen Group.

"But there doesn't need to be any systemic risk in order for markets to be affected because there isn't enough clarity on how Evergrande's challenges may affect the global economy and that uncertainty is enough to spook markets."