Thu, Mar 06, 2014 - Page 15 News List

Threat of China corporate bond default vexes market

NOT ALL BAD:Although a possible onshore corporate bond default worried financial institutions, analysts said it could help build a healthier market in the long term


A Chinese solar company is threatening not to pay interest on a corporate bond, setting off alarms in the financial system, but analysts said yesterday that a default could improve transparency.

Shanghai-based Chaori Solar Energy Science & Technology Co (超日太陽能) said it was unable to make interest payments of 89.8 million yuan (US$14.7 million) due tomorrow on a bond issued in 2012, according to a statement issued on Tuesday through the Shenzhen stock exchange where it is listed.

Some analysts have described it as China’s first default for an onshore corporate bond.

The China Business News said it was the country’s first “substantive” default since a steel company, Angang Steel Co (鞍鋼), had previously delayed interest payments and so-called “collective bonds” issued by groups of small enterprises had also missed payments.

However, analysts said a Chaori default would help build a healthier market in the long term.

“It’s a good thing, as a normal economy needs those defaults to better price bonds and other debt products,” Bank of America Merrill Lynch economist Lu Ting (陸挺) said.

“Defaults of some debt products are definitely not on a similar scale to a collapse of a major financial institution,” he said in a research note. “Corporate bonds and incoming trust loan defaults won’t lead to credit crunch.”

The news came after worries earlier this year over financial products issued by China’s roughly 65 trusts, which have drawn comparisons to American “junk bonds” of the 1980s.

In one case a US$160 million investment product structured by Jilin Province Trust and backed by a coal firm failed to repay capital and interest five times by the middle of last month.

Separately, a US$500 million investment product that was structured by China Credit Trust Co (中誠信託) avoided default after an unknown party made good on principal payments to hundreds of investors, though they have not received pledged interest.

That product was also backed by a loan to a coal firm, and sold by China’s largest bank Industrial & Commercial Bank of China Ltd (ICBC, 中國工商銀行).

Central China Securities Co (中原證券) analyst Zhang Gang (張剛) said about Chaori: “In the short term there will be some impact, but as to the whole financial system, the emergence of some defaulting companies will help everyone raise their risk expectations.”

Chaori has been suspended from trading on Shenzhen’s small- and medium-enterprise board since Feb. 19. It last traded at 2.59 yuan.

Chinese stocks fell the most in a week amid concern the country faces its first onshore corporate bond default this week, with the Shanghai Composite Index slipping 0.89 percent to 2,053.08 at the close.

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