Solar panel maker Shanghai Chaori Solar Energy Science & Technology has defaulted on interest payments owed on its bond, say media reports quoting the firm. It is the first Chinese firm ever to default on its onshore corporate bonds.
On Tuesday, the firm warned it would be unable to make a 89.8 million yuan ($14.6m; £8.7m) interest payment on a one billion yuan bond issued in 2012. The default is seen as a test case for the Chinese government. Investors have assumed in the past that the Chinese government would bail out any Chinese corporation in danger of defaulting. The move to allow Chaori to default signals a new stance.
"There's never been a corporate bond default, [so] investors have been conditioned that there is no such thing as risk in China," Leland Miller, president of research firm China Beige Book, told the BBC. "The Chinese leadership is trying to break down this misunderstanding that everything is backstopped." Chaori Solar said it planned to pay 4 million yuan ($654,000) of the interest payment due on the billion yuan bond, which was taken out two years ago.
Up until now, the Chinese government and state-owned banks have helped bail out or provide last-minute loans to Chinese firms in trouble. That has led many investors to park their funds in the corporate bonds of many Chinese firms, on the belief that the government would help ensure that these firms could continue to repay their debts. However, a significant portion of this debt is set to mature in 2014 - with more than $1.5 trillion of corporate bonds outstanding at the end of January. "There's not enough money in the world to bail everything out," said Mr Miller.
Chaori Solar took out a $1bn bond two years ago to help finance operations
That is why the Chinese government may be making a strategic decision to let some firms fail - particularly those, like Chaori, that may not have a huge knock-on effect in the market. China's solar industry has been suffering from an overcapacity problem for some time, as cheap financing and local government support led to a glut of firms entering the industry. That has led to a sharp fall in price, and the Chinese government has since hinted that it supports consolidation in the industry.
Other Chinese solar panel firms, like LDK Solar, have already defaulted on bonds issued outside China.
"This is something they need to do - that the government has to do - in order to address the over capacity in many industries," Fitch Ratings' Kalai Pillay told the BBC. (BBC NEWS 2014/3/7)
