More companies should be allowed to default on their bonds, an external supervisor at the Bank of China said, a day after a solar-cell maker became the first to do so.
“We need to be more accepting and allow such defaults to happen,” Mei Xingbao said during a meeting of the Chinese People’s Political Consultative Conference in Beijing.
“The debtor must be responsible for his own debt. He must tell the investors that there is risk involved in the product.”
Mei’s remarks add to indications that Communist Party leaders will allow more debt to go bad rather than intervening to bail out investors. It agreed last year to let markets play a more decisive role in the economy.
China’s onshore bond market experienced its first default on Friday when Shanghai Chaori Solar Energy Science & Technology missed a deadline to pay the full 89.8 million yuan (HK$113.7 million) interest due on its bonds. A default would be a “wake- up call” and advance the growth of China’s bond market, Moody’s Investors Service said.
Previously, the government and corporations would ask the People’s Bank of China for a new loan to pay back debt as a way to maintain stability in society, Mei said. “In a more market-driven bond market, this should not be the situation,” said Mei, former president of China Orient Asset Management Corp.
Orient was one of four asset-management firms set up by the central government in 1999 to buy bad debts from the big banks and help clean up a financial system on the brink of bankruptcy.
The decision to let Chaori default was a “good start” towards helping the market price risk, Liu Mingkang, former chairman of the China Banking Regulatory Commission, said at the CPPCC meeting yesterday.