China poised for first bond default
Solar firm says it cannot meet interest payment on note, a failure that will mark new era for the domestic debt market unless the state steps in
Shanghai Chaori Solar Energy Science and Technology has announced it could pay only four million yuan (HK$5 million) of an 89.8 million yuan interest payment to bondholders falling due tomorrow.
Barring last-minute intervention by the authorities or a friendly state bank, this will be China's first default on a domestic bond.
The event marks a new era in the debt market where investors can no longer assume all debt is risk-free.
"The Chinese government is breaking its implicit guarantee on all domestic bonds," said Lu Ting, a China economist at Bank of America Merrill Lynch.
Analysts and investors have been widely expecting to see defaults this year after the country's leaders talked during a party plenum in November last year about the need for the market to play a "decisive role", which many interpreted as letting investors take losses on bad investments.
The government is breaking its implicit guarantee on all domestic bonds
The big question is whether the market will take the first default in its stride or whether it would trigger more defaults from issuers seeking to refinance debt.