China's 5Y CDS Broke Out To Early 2009 Levels, FXI at 2010 Support Level (Charts/Links)

China 5Y CDS vs. FXI (see below)
China's 5-year credit default swap spread (CDS), or cost to insure its government bonds (or really credit risk that trades since China can always print Yuan), broke out to levels not seen since early 2009 this week (113 basis points on 8/8/2011). The CDS market is smarter than the rest, so I'm wondering what this means. It looks like FXI (iShares China 25 Index) and China 5Y CDS are inversely correlated, so does that mean FXI breaks through 2010 support at $35? Or will China hold on here. FXI is 50% weighted in financials. See charts below.

Why is China's sovereign credit risk rising? I remember last month Moody's released a report that said China's National Audit Office "could be understating banks' exposures to local governments" by $540 billion and said "these loans are most likely poorly documented and may pose the greatest risk of delinquency". According to The Diplomat (via Business Insider), China's Debt/GDP ratio could be much higher than reported (70-80% instead of 20%). Other than that, global economic growth is slowing, China is slowing, asset markets have been crashing globally, U.S's credit rating got downgraded (China owns $1.2 trillion of Treasurys and have a large portion of their $3.2 foreign reserves denominated in U.S. Dollars), the Dollar/Yuan peg hit new lows, PBOC has been raising rates and reserve requirements to try to curb inflation. So maybe all of this is starting to be priced in. Read all of these articles below on China's economy (and see FXI/China CDS charts).


Andy Xie on China's Holdings of U.S. Debt, Economy, Yuan and Diversifying into other Dollar assets Aug. 9 - Bloomberg TV

TABLE - China's economic indicators as of Aug 10, 2011 - Reuters

China July Metals Output Eases, Signaling Slowdown - WSJ

China's industrial value-added output up 14% in July ("down 1.1 percentage points from that of June") - Xinhua

China's Economy Is Headed for a Slowdown by Michael Pettis - WSJ

China Sets Yuan at Record Strength ("The People's Bank of China set the dollar/yuan central parity, a daily reference rate, at 6.4167, its lowest ever") - WSJ

IEA: China oil demand growth revised down - MarketWatch

China Inflation Quickening to 6.5% Limits Policy Response to Global Crisis - Bloomberg

Pork price rises drive up Chinese inflation - Telegraph

China’s Trade Surplus Surges to $31.5 Billion - Bloomberg

Swaps Show Interest Rate Rises May Slow as Inflation Holds: China Credit - Bloomberg

China May Delay Rate Rises Until 2012 as Market `Chaos' Threatens Exports - Bloomberg

Is China Weakening Its Stance On Inflation Fighting? - Business Insider

China’s Premier Wen Jiabao Urges Global Cooperation to Stabilize Markets - Bloomberg

Commentary: After historic downgrade, U.S. must address its chronic debt problems - China Daily (China National Paper)

China urges US to ‘live within its means’ - FT.com

China can break free of the dollar trap - FT.com

Asia to keep buying US debt despite downgrade - AP

China Lets Food-Oil Prices Rise, Easing Its Tight Controls - WSJ

China's Official PMI Falls - WSJ (8/1)

China manufacturing survey points to contraction (HSBC manufacturing PMI: 48.9 in July down from 50.1 in June) - MarketWatch (7/21)


China 5Y CDS vs. FXI (Courtesy Bloomberg.com)


FXI (courtesy of StockCharts.com)



China 5Y Credit Default Swap Spread (courtesy Bloomberg.com)


UPDATE 10/11/2011: FXI did in fact break down!

China 5Y CDS Breakout Predicted FXI Breakdown, Sovereign CDS Info (Charts): http://www.distressedvolatility.com/2011/10/china-5y-cds-breakout-predicted-fxi.html

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