China to introduce credit-default swaps

New instrument will allow banks to hedge risk and restrict contracts

NEW YORK - China will introduce credit-default swaps by the year-end, allowing banks to hedge risk while restricting the contracts to avoid pitfalls the US credit markets experienced over the last several years, according to an official with a Chinese financial association.

China will limit the amount of leverage used in credit swaps and won't permit the contracts to be written on high-risk assets such as subprime mortgages, Shi Wenchao, secretary-general of the National Association of Financial Market Institutional Investors (NAFMII), told reporters at a briefing in New York. Investors in the derivatives will also be required to own the underlying security, Shi said.