China's First Corporate Bond Default

On Friday, China experienced its first corporate bond default since the country established a bond market in the early 90s. Shanghai Chaori Solar, a small solar energy company, failed to fully pay out the interest of a bond they sold two years ago. Chaori owed RMB 89.8 ($14.6 million USD) in interest by 3 PM on March 7, when the domestic bond markets closed. Liu Tielong, Chaori’s board secretary, announced that the company will still try to make payments to investors, even though they could not meet the deadline for this particular interest payment.

Liu also acknowledged that Chaori was officially in default, saying that he wasn’t aware of any plan by the government to bail out bond investors, as the government had done a year ago when Chaori had threatened to default. Several investors mentioned that the company had paid them roughly 4.4% of the interest they were due, and they did not expect to be paid any more, especially considering suspension of the company’s bonds last July and their equities last month. Chaori agreed with this number, saying that they had only managed to pay RMB 4 out of the RMB 89.9 interest that the investors were due.

While some analysts have suggested that this moment would be a wake up call for investors to reassess the risks of investing in corporate debt, many bond traders suggested that the market was prepared for the Chaori announcement. A credit officer at Moody’s Hong Kong suggested that everyone had been expecting Chaori to default for quite some time, considering the market had already priced in their risk. Many analysts also suggested that the Chinese’ government’s decision to not bail the company out was a push towards more responsible asset pricing with regards to risk. Many have suggested that several other defaults are expected to come due to this new policy. This is a first step in a movement towards hands-off fiscal policy by the Chinese government. They are hoping that the movement will lead to increased responsibility from all groups involved. Chaori may be in trouble, but this should begin a trend of better risk analysis in the Chinese bond market.

  • Abhishek Parekh