Monday, December 6, 2010

RBS Recommends Buying CDS Insurance Against Possible Chinese Debt Default That Will Have Ramifications Across Asia

Well, this is new. RBS, Royal Bank of Scotland has advised its clients to take out protection against the risk of a sovereign default by China. That is as one of its top trade trades for 2011.

Tim Ash, the bank’s emerging markets chief says that "Many see China’s monetary tightening as a pre-emptive tap on the brakes, a warning shot across the proverbial economic bows. We see it as a potentially more malevolent reactive day of reckoning,"

"Inflation is a redistributive mechanism in favour of the few that can protect living standards, against the large majority who cannot. The political leadership cannot, will not, take risks in that regard,"

It warns that the Communist Party will have to puncture the credit bubble before inflation reaches levels that threaten social stability. According to The Telegraph, this in turn may open a can of worms.
"Officially, inflation was 4.4pc in October, and may reach 5pc in November, but it is to hard find anybody in China who believes it is that low. Vegetables have risen 20pc in a month.

RBS recommends credit default swaps on China’s five-year debt. This is not a forecast that China will default. It is insurance against the "fat tail risk" of a hard landing, with ramifications across Asia.

China is trying to keep the game going as if nothing has changed, but cannot do so. It dares not raise rates fast enough to let air out of the bubble because this would expose the bad debts of the banking system. The regime is stymied".


"The sons of Mao insist that they have studied the Japanese debacle closely and will not repeat the error. And I can sell you an ocean-front property in Chengdu."

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