Shanghai Chaori Solar Energy defaults on bond issue
Solar cell producer the first company to fail to make interest payment on a mainland debt paper, triggering fears it will lead to a financial crisis
Shanghai Chaori Solar Energy Science & Technology yesterday became the first company to default on a bond on the mainland.
The solar cell maker was unable to cover an 89.8 million yuan (HK$113.7 million) interest payment that came due.
The mainland share market took the widely expected default in its stride - the CSI 300 Index closed just 0.24 per cent lower - but concern is building about contagion-fuelled liquidity risk.
Speaking on the sidelines of the National People's Congress in Beijing, Ouyang Zehua, an official with the China Securities Regulatory Commission, said the watchdog would keep a close eye on any contagion stemming from the default.
"We will focus our attention on whether it will trigger regional or even systemic risks. This is what Premier Li Keqiang has repeatedly stressed in his government report that the financial system needs to safeguard the bottom line against regional and systemic risks," Ouyang said.
A Bank of America Merrill Lynch report said the default could mark China's "Bear Stearns moment", a reference to the US firm that failed in 2008 and ignited the global financial crisis.
The report said Chaori's default was likely to start a chain reaction of capital flight and more defaults.
It said China was at risk of having its own Lehman moment, or a fully fledged banking and markets crisis.
"In the US, it took about a year to reach the Lehman stage when the market panicked and the shadow banking sector froze. It may take less time in China as the market is less transparent," it said.
The yield on five-year AA-minus notes on the mainland market rose eight basis points to 7.77 per cent on Wednesday. It rose five more points on Thursday.
Ratings of AA-minus or below in China are equivalent to non-investment grades globally, according to Haitong Securities.
"People are concerned there will be a lot of bonds without good credit [defaulting]. There is a concern about a domino effect," said Philip Li, a managing director at China Chengxin International Credit Rating, a mainland ratings agency.
Chaori issued in March 2012 a one billion yuan, five-year bond with a coupon of 8.98 per cent. On Tuesday, the company said it did not have funds to cover the interest payment due yesterday.
In a first for the mainland market, the government did not orchestrate a bailout and let the issuer default.
"The timing was shocking because it hit just as the NPC came into session," said Ying Wang, a Shanghai-based director for ratings agency Fitch.
Concern over Chaori's default prompted Suining Chuanzhong Economic Technology Development to delay a one billion yuan debt issue while two other companies halted their deals, blaming market volatility.
Chuanzhong said on Wednesday the news Chaori was set to miss yesterday's coupon payment "triggered severe upheaval in the bond market", so it had delayed its bond deal.
Taizhou Kouan Shipbuilding postponed a 300 million yuan issue of short-term commercial paper, while Xining Special Steel cancelled a 470 million yuan offering of medium-term notes, the companies said.
Reuters reported yesterday Shanghai Jin Jiang International Hotels Development was also scrapping its bond.
Deng Ge, a CSRC spokesman, said the government would amend rules governing bond issuance this year to bolster market development while better protecting investors.
Deng said the regulator would examine the system for credit ratings and streamline regulation of the nation's fragmented bond market.