How to Prepare For China's Coming Derivative Default

By Graham Summers
Sep 14 2009 11:40AM
www.gainspainscapital.com

In case you have not heard the news, China has announced that it will be instructing its state-owned enterprises to potentially default on their derivatives contracts. As I have written extensively in the past, the derivatives market is a massive time bomb just waiting to go off. China’s latest move may be the match that lights the fuse.

All told, US Commercial banks own $202 trillion in derivatives in notional value. To put that number into perspective, it’s roughly four times the global GDP. And 96% of this exposure sits on five banks’ balance sheets. I’ve shown the below chart before, but it’s worth re-visiting (chart is denominated in TRILLIONS).

Of course, not ALL of the $202 trillion these guys own is “at risk.â€