Baoding Tianwei default cheers China debt watchers
State-owned enterprise's failure to meet interest payment helps stress test bankruptcy laws and impose discipline on nonchalant market players
A corporate default is not normally grounds for celebration. That, however, was how China debt watchers greeted the news last week that a power transformer manufacturer could not meet an 85.5 million yuan (HK$108.3 million) interest payment.
"I think it is welcome, but what we want to see in 2015 is some sort of failure of a financial institution. Ultimately, whether the government has the commitment to mediating moral hazard that commitment will be tested when we have to deal with financial institutions," Xu Sitao, China chief economist at Deloitte, told the South China Morning Post.
As China's economy cools and default risks heat up, analysts say failures are needed to stress test the nation's bankruptcy laws and impose tighter discipline on market players nonchalant about risk and presumptive of government bailouts.
The economy grew an annualised 7 per cent in the first three months of this year, the slowest quarter since 2009, putting pressure on a debt mountain that rose from about 150 per cent of gross domestic product in 2008 to 236 per cent in mid-2014.
Defaults show Beijing's "commitment to progressively move the financial system towards a more market-oriented approach and risk-based credit pricing," Standard & Poor's credit analyst Cindy Huang said.
What helped make Tuesday's default so special? Unlike recent problem cases, such as property developer Kaisa Group Holdings and internet firm Cloud Live Technology, Hebei-based Baoding Tianwei Group is state-owned.
Operating in a sector plagued by overcapacity, as a state-owned enterprise Tianwei was a play investors might once have assumed was risk-free.