China May See First Ever Corporate Bond Default

Shanghai Chaori Solar Energy Science & Technology, which is listed on the SME Forum of the Shenzhen Stock Exchange, said on 4 March that it could not pay RMB89.8 million (US$14.6 million) in interest on a RMB1 billion bond it issued in 2012. The company said it had raised only RMB4 million for the interest payment that is due on 7 March.
 
If Shanghai Chaori cannot find the money, it will be “the first ever default in China’s US$1.5 trillion publicly traded corporate bond market,” said the Wall Street Journal. Overcapacity in the solar power industry caused prices to fall by a third last year even though demand for solar panels continued to grow.
 
It is unclear whether the government will step in and arrange some form of bailout for Shanghai Chaori. In a report, Bank of America Merrill Lynch notes that "the involved parties, including the local government and the bond underwriter, have substantial resources so they could have bailed the bond out, in theory." 
 
Officials are said to be worried that a default could lead to higher borrowing costs for other companies that are struggling with debt repayment, reported the Journal.
 
On the other hand, the fact that there has never been a default in the publicly traded corporate bond market has emboldened risky lending practices in the belief that the government will always step in, and “could cause more wasteful investments in industries that have already suffered overcapacity,” said the newspaper. 

 

If Shanghai Chaori indeed defaults, especially on the principal, China may reach its "Bear Stearns stage," warns Bank of America, referring to the demise of the US investment bank that helped precipitate the 2008 global financial crisis. The markets may then start to "seriously re-assess subprime debt risk" in China.

 

But the bank does not expect an immediate liquidity crunch because of the default. It took about a year after Bear Stearns for markets in the US to panic and for the shadow banking to freeze. Because the Chinese market is less transparent, however, "we assess that it may take less time in China," concludes the Bank of America report.

 

 

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