China’s first domestic bond default looked set to occur as expected yesterday as there was no sign of a last-minute bailout for solar equipment producer Chaori Solar, an event seen as a landmark for market discipline in the world’s second-largest economy.
The loss-making Shanghai Chaori Solar Energy Science and Technology Co. Ltd warned this week it could only pay out less than five per cent of the 89 million yuan ($14.5 million) in interest due on one billion yuan worth of bonds issued in 2012.
After a series of near misses in recent years, in which local governments stepped in at the last minute to rescue local champions, analysts say the precedent-setting default is likely to force a re-pricing of credit risk in a market that long assumed even high-yielding debt carried an implicit state guarantee.
“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,” said Christopher Lee, managing director of corporate ratings for Greater China at Standard & Poor’s in Hong Kong.
“Incidence of defaults will likely be incremental but controlled,” he said, nominating metals and mining, shipbuilding and materials as the key sectors with high default risks.
Chaori did not answer calls seeking comment yesterday. But no further statements are expected, as the company’s exchange filing late on Tuesday met the requirement that bond issuers notify investors two days in advance about payment arrangements.
Markets were stoic ahead of the expected default. The benchmark seven-day bond repurchase rate was little changed at 2.45 per cent at mid-morning, its lowest since 2012. That weighted-average rate had briefly spiked on Wednesday after Chaori announced it would default, but has since plunged.
The Shanghai Composite Index was down less than one per cent since Tuesday's close.
“A default would likely make investors recalibrate their risk-return consideration for onshore bonds,” Ivan Chung, senior credit officer at Moody's Investor Services in Hong Kong, said in a note.
“Credit risk would play a more important role in pricing, thereby making the bond market more efficient in the allocation of capital.” (Reuters)