Chaori Solar default is a test case for China's markets

Solar panels The default of Chaori Solar could send tremors through not just China but global markets as well

Not big news for most countries, but China has had the first ever default of a corporate bond today.

Chaori Solar, a solar equipment maker, can't afford to pay 89.9 million RMB ($14.7m) in interest due on an one billion RMB bond issued in March 2012. It's the first default of publicly traded debt in China since the government started regulating in 1999. Although small, it could send tremors through not just China but global markets.

The company said this on Tuesday and issued a warning last summer so there are no surprises.

Normally when a company warns that it can't afford a payment, it's viewed as a worrying development. For China, though, attitudes are sanguine as this is viewed as a test case for how the government will deal with what should be a normal procedure.

That's because in China, it's not what normally happens. But as the country develops its financial sector, defaults and bankruptcies are part of the usual course of how markets operate.

Test for new market

For China, which didn't have much of a corporate bond market until recently, this is new. But, the market in corporate debt has grown quickly in the past decade, reaching an estimated $12 trillion by the end of last year.

Previously, where there have been threatened defaults such as in January when a "shadow bank" institution was bailed out to prevent a default on a trust or the rolling over of bank debt, the government has acted due to worries over what defaults could trigger.

But, as Chaori Solar is a corporate bond issued by a struggling company and not a product of the shadow banking system like a trust, some observers would like to see market forces work.

Otherwise, it's hard to see how financial markets can expand and deepen as the government cannot feasibly stand behind all capital markets unlike what it has done so far in the banking system.

This would make a test case since the Chinese government does want to expand non-bank financial markets to take some pressure off of the state-dominated banking system. What they fear is that if default becomes possible, then confidence may drain from the system. This is why shadow banks have been quietly bailed out (see my prior blog).

It's one reason why the Premier Li Keqiang said in his speech to the national legislature that a deposit insurance system will be set up. Right now, the banking system is premised on the government always being on hand to bail it out. But as the financial sector expands, and it already exceeds annual output, it'll become recognisably less feasible.

The challenge for financial reform is that the sequence of policies matters. Allowing default may well help develop the market, but the questions that it could raise about the rest of the financial system, namely the banks and shadow banks, may be a step that the Chinese government would rather not tread. A junk-rated bond could have wider repercussions beyond China.

Linda Yueh Article written by Linda Yueh Linda Yueh Chief business correspondent

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  • rate this

    Comment number 27.

    "shadows are closing"

    In business as in art & science, should be our delight to take risk, calculated, to back hunches & find successes, to pitch again if need be, even if only in our spare time pending return to favour.

    The shadows are of our own creation: even with greatest inheritance, safest pension, daily the fear of personal & family ruin, tied to 'tat' as if its loss of real moment

  • rate this

    Comment number 26.

    This is how it will start in China. The Chinese economy is 50% empty new buildings and 50% ramshackle old factories belching and churning out cheap tat for export to the West.

    The West never could afford the tat but now no longer wants it or needs it. The Chinese cannot afford their nice shiny new empty cities on a hill or their cheap tat.

    The shadows are closing in on the Chinese economy.

  • rate this

    Comment number 25.

    Knut Knutsen @24
    go bankrupt"

    Real issue is not in taking of risk, but in motive (contribute value or serve fear & greed) & consequences (if of personal ruin, stoking drives of fear & greed) poisoning the wells of ambition, trust, progress

    Many small personal 'component tragedies' add-up to massive collective problems, commercially hidden or politically ignored until over the cliff

  • rate this

    Comment number 24.

    Even in a boom companies go bankrupt.

    The Liquidators & Accountants move in scrape all the money into a big pile and split it between the creditors.

    The process is not without it's component tragedies but generally a small number of Bankruptcies won't trash an economy.

    It would be more worrying if no businesses failed!

  • rate this

    Comment number 23.


    Tricky, rolling contract, analysis not unreasonably approached in terms of 'generations', inheriting much physical & social capital, also 'debt': moral to honour state pensions etc from tax on current income; legal to honour contracts; implicit to 'control' inflation. What of old hoards, old contracts, in new society agreed on equal partnership democracy? Traded for security


Comments 5 of 27


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