– No government rescue as first Chinese company defaults on domestic bonds (Guardian, March 7, 2014):
Analysts say Shanghai Chaori Solar default shows China is beginning to let market decide fate of weak borrowers
A solar-panel manufacturer has become the first Chinese company to default on domestic bonds, in a watershed moment for market forces in the world’s second largest economy.
There was no sign of a last-minute government rescue for Shanghai Chaori Solar, after the firm failed to repay the bulk of an interest repayment that was due on Friday.
The loss-making firm warned earlier this week it would be only be able to repay 4m yuan (£389,000) out of the 89m yuan interest payment, due on 1bn yuan of bonds issued in 2012.
Liu Tielong, Chaori’s board secretary told the Wall Street Journal on Thursday that the Shanghai government “hasn’t promised anything and is treating our debt crisis according to market rules”.
He said a bondholders’ meeting to discuss the debt would be called in the coming days. “We will try our best to pay bondholders as soon as possible but the company also has other debts,” said Liu. The default happened after a last-gasp refinancing plan fell at the final hurdle, according to local media.
Analysts said the move was a step forward for market discipline, in contrast to the customary government interventions to prop up struggling companies. “The Chaori default goes to show the government will begin to let the market decide the fate of weak borrowers. This test case indicates the government is addressing the moral hazard issue,” Christopher Lee, managing director of corporate ratings for Greater China at Standard & Poor’s, told Reuters. “Incidence of defaults will likely be incremental but controlled,” he said, naming metals and mining, shipbuilding and materials as key default risks.
Ivan Chung at Moody’s credit rating agency said: “Credit risk would play a more important role in pricing, thereby making the bond market more efficient in the allocation of capital.”
At least three companies have announced plans to postpone bond sales in the wake of the Chaori default.