Chinese corporate bonds no longer have a government backstop as solar cell firm defaults

Overseas investors have so far assumed that Chinese corporations would be bailed out by banks and the government if there was any danger of them defaulting. That assumption has now gone up in smoke as the Chinese Government – probably intentionally and as a signal – has allowed Chaori Solar to default. Chinese corporate bonds are now going to get a lot less attractive.

The strange fact about solar subsidies – around the world – is that the equipment manufacturers and the consumers have not benefited. Only plant developers have effectively walked away with the subsidies and they are usually very good at milking subsidies. As subsidies dry up it makes more sense for them to just walk-away. Solar (and wind) equipment manufacturers ramped up their production capabilities – sometimes by very expensive acquisitions – and are now in dire straits as subsidy reductions has caused the market to dive.

Bloomberg:Chaori Can’t Make Payment in China’s First Onshore Default

A Chinese solar-cell maker failed to pay full interest on its bonds, leading to the country’s first onshore default and signaling the government will back off its practice of bailing out companies with bad debt.

Shanghai Chaori Solar Energy Science & Technology Co. (002506) is trying to sell some of its overseas plants to raise money to repay the debt, Vice President Liu Tielong said in an interview today at the company’s Shanghai headquarters. The company said March 4 it will only be able to pay 4 million yuan ($653,990) of an 89.8 million yuan coupon due today.

The BBC warns:

Up until now, the Chinese government and state-owned banks have helped bail out or provide last-minute loans to Chinese firms in trouble. That has led many investors to park their funds in the corporate bonds of many Chinese firms, on the belief that the government would help ensure that these firms could continue to repay their debts.

However, a significant portion of this debt is set to mature in 2014 – with more than $1.5 trillion of corporate bonds outstanding at the end of January. …… That is why the Chinese government may be making a strategic decision to let some firms fail – particularly those, like Chaori, that may not have a huge knock-on effect in the market.

China’s solar industry has been suffering from an overcapacity problem for some time, as cheap financing and local government support led to a glut of firms entering the industry. That has led to a sharp fall in price, and the Chinese government has since hinted that it supports consolidation in the industry. ……… 

Yet while some see the default as a good thing for China’s corporate bond market, others worry it could be a sign of a wave of defaults to come. Bank of America analysts wrote in a recent note that the default could be “China’s Bear Stearns moment”. “In the US, it took about a year to reach the Lehman stage when the market panicked and the shadow banking sector froze,” they wrote. “We assess that it may take less time in China, as the market here is less transparent.”

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