China may allow its first-ever corporate bond default

When it comes to China’s financial system, the unexpected default of a tiny solar company might do more for reform than the 32 pages of central government planning that premier Li Keqiang announced in a government work report earlier today.

Specifically, the default of Shanghai Chaori Solar Energy on its 1-billion-yuan ($163-million) bond might help speed the pace of market reform. If the government refuses to bail out the maker of solar cells and panels, this will be the first bond default in the history of China. Yes, that’s right: in China’s whole $1.5-trillion publicly traded corporate-debt market, no company has ever defaulted.

Letting this default happen could be a massive deal for a couple of reasons. For one, a default will force the market to start pricing in risk, explains Leland Miller, president of China Beige Book (CBB) International, a research firm.

“Anything that can inject risk in the system and differentiate what is backstopped and not backstopped is a very good thing for China,” says Miller. “Right now everyone thinks the banks are backstopping everything and that the government is backstopping (the banks). And that’s very, very dangerous, especially in a year where you’re likely to see a lot of defaults.”

Until now, high-profile investment products on the brink of default have all been bailed out at the 11th hour. It’s not surprising that people assume that someone—banks or the government—will recoup their losses. As we’ve reported, more than 43% of the 10.9 trillion yuan ($1.8 trillion) worth of outstanding trust products come due in 2014.
<snip>

http://qz.com/184320/this-is-huge-china-may-allow-its-first-ever-corporate-bond-default/#184320/this-is-huge-china-may-allow-its-first-ever-corporate-bond-default/