HONG KONG â€" A small solar company in Shanghai appears set to become the first company to default in China’s huge but protected domestic bond market.
Late on Tuesday, the company, Shanghai Chaori Solar Energy Science and Technology Company, issued a stock exchange announcement saying that, “due to various uncontrollable factors,†the company is unlikely to be able to meet an annual interest payment that is due on Friday.
Chaori, a struggling solar panel maker, owes interest of 89.8 million renminbi, or about $15 million, on a 1 billion renminbi bond it sold to domestic investor in 2011.
According to its stock exchange filings, however, Chaori has been able to come up with only about 4 million renminbi to fund the interest payments â€" meaning that unless it receives a bailout or somehow generates new funds, the company would become the first to default in China’s huge and fast growing domestic bond market.
While Chinese companies, including solar panel makers, have previously defaulted on American dollar debt that they sold to international investors in the offshore bond markets, analysts said a default in the nation’s much larger and closely cosseted domestic debt market would be a significantâ€"and arguably long overdueâ€"development.
“We think it’s a good thing as a normal economy needs defaults to better price bonds and other debt products,†Ting Lu, a China economist, and other analysts at Bank of America’s Merrill Lynch unit wrote Wednesday in a research note. “Defaults of some debt products are not on a similar scale to a collapse of a major financial institution.â€
China’s onshore corporate bond market has grown rapidly in recent years, outpacing overall credit growth across the economy. Total corporate bonds outstanding rose to 8.7 trillion renminbi as of January, or around $1.4 trillion at current exchange rates, more than ten times the 800 billion renminbi outstanding at the end of 2007, according to Bank of America’s Merrill Lynch.
Overall, despite the relative immaturity of the country’s bond markets, China’s corporate sector has loaded up on debt more aggressively than households or local governments.
Total debt in China stood around 210 percent of the country’s gross domestic product at the end of last year, a figure that is relatively high for China’s level of development, Louis Kuijs of the Royal Bank of Scotland wrote Monday in a research report.
Of that total, household debt was equal to 34 percent of G.D.P., while the ratio for government debt was 57 percent of the economy and corporate debt was 119 percent.
