CHINA’S FIRST ONSHORE default since the corporate bond market was opened up in 1997 is at hand. Solar-panel maker Shanghai Chaori Solar Energy Science & Technology has technically defaulted on its 1 billion yuan ($163 million) five-year bond issued in 2012 after warning last month that it would be unable to meet in full a 89.8 million yuan ($14.7 million) interest payment due March 7. The company says it was only able to pay 4 million yuan on the due date.
By not coming to the issuer’s aid, and as they are doing with defaulting trusts, authorities are warning that the implicit guarantee that investors have assumed government gives to every issuance no longer holds true. Big money is at stake. Chinese companies had 8.7 trillion yuan of bonds outstanding as of end-January (up from 800 billion yuan at end-2007). That makes Chaori’s default a drop in the bucket, one reason that central government is letting it default. The ripple will be salutary rather than financial.
Investors have had time to prepare. Chaori’s bonds were suspended from trading last July and its equities, listed on the Shenzhen exchange, last month. Authorities, though, will be hoping now the day of default has come it does not turn into “China’s Bear Stearns moment” as analysts at Bank of America have warned, referring to the way investors reassessed credit risks when the U.S. investment bank had to be bailed out by Washington in 2008 triggering a chain of events that led to the crash of Lehman Bros. and the global financial crisis.
Another reason to let Chaori go is the dire state of the solar panel industry where the government is promoting the consolidation of weaker players to remove excess production capacity. (Another solar panel maker, LDK Solar, has previously been allowed to default on its offshore bonds and to go to the brink of bankruptcy, a precipice that Wuxi SunTech went over.) Nonetheless, four companies have scrapped bond sales that would have raised an aggregate 1.27 billion yuan while yields on Chinese junk-bonds have jumped in the wake of Chaori’s default.
Getting lenders and investors to better price risk in domestic credit markets and corporate managers to better understand what is a realistic return on their investments in plant and equipment is exactly what President Xi Jinping and Premier Li Keqiang meant when they said market forces would be allowed to play a greater role in the Chinese economy. This Bystander expects more low-key corporate bond defaults to come in other industries suffering from excess capacity such as steel, metals and shipbuilding.