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China suffers first corporate-bond default

  • As expected, China's corporate-bond market has suffered its first ever domestic default, with Shanghai Chaori Solar Energy Science & Technology failing to fully pay 89.8M yuan ($14.7M) in interest that was due today.
  • Until now, China had bailed out distressed companies.
  • Moody's believes that the default will be a "wake-up call" that will help the growth of China's bond market. It will "signal regulators' higher tolerance for corporate bond defaults amid financial market reforms, which is in line with the current central administration's shift to adopt more market-oriented policies," Moody’s says.
  • Meanwhile, the Shanghai government has reportedly given authorization for a city-owned investment company to purchase non-performing loans from local banks. The approval follows similar approval by other municipalities and indicates how Shanghai is preparing for an expected rise in bad debt.
  • The markets reacted calmly to Chaori's default and the Shanghai Composite closed -0.1%.
  • ETFs: FXI, PGJ, GXC, FXP, YINN, CYB, CNY, DSUM, YANG, MCHI, XPP, YAO, FXCH, CHXF, YXI, HYEM, EMHY, FCA, TCHI, CHLC
Comments (3)
  • Mike Holt
    , contributor
    Comments (1527) | Send Message
     
    As Moody's points out, this may be a sign that the new CCP leadership intends to allow markets to play a more decisive role. It may also reflect a higher level of tolerance for increased transparency.

     

    However, its easy to take the postures with respect to a late interest payment of only $14.7 million. Where will China draw the line in terms of banks and large corporate borrowers that are Too Big To Fail?

     

    And, as for the rest of the world, has China already become TBTF?
    7 Mar, 07:36 AM Reply Like
  • Michael Nau
    , contributor
    Comments (972) | Send Message
     
    This is good in the very long run, having a multi-trillion dollar corporate bond market without credit risk will lead to all sorts of destructive behavior.

     

    But in the medium term, China's debt-fueled growth will crumble if the credit spigot is turned off. I wouldn't want to be a CCP policy guy right now.
    7 Mar, 07:55 AM Reply Like
  • Physical Receipt
    , contributor
    Comments (819) | Send Message
     
    Well this is a step in the right direction but as you mention Mike H. there are some bigger possible defaults in the pipeline and those will be the acid test of real change or not....
    7 Mar, 11:53 PM Reply Like
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