Recently, China has experienced its first-ever default of a corporate bond and this default has led to the idea that China may experience a ‘Bear Stearns moment’ or a ‘Lehman moment’. The Chinese solar company Shanghai Chaori Solar Energy Science and Technology Company announced that it cannot pay interests in the amount of roughly $14.6 million on its 11 Chaori bond. The interest payments were due on March 7th. Unlike the fall of Bear Stearns and the bankruptcy of Lehman Brothers, Chaori’s default did not change the market’s perception of inherent credit risk in the economy or cause a liquidity crunch. The reason why Chaori’s default did not impact the economy the same way Bear Stearns and Lehman Brothers did is because it was known for some time that the solar company was in trouble.
Despite this, Lombard Street Research’s Diana Choyleva believes that “China’s Bear Stearns moment may strike any time”. China’s overall debt reached 238% of GDP last year. Choyleva writes that China could “use its ability to absorb loan losses to postpone the debt problem and defer financial market reform”. Choyleva also argues that even with reforms China faces financial distress, but without the financial reform, the debt will continue to rise and will cause a bigger crisis. Choyleva predicts that if China does not choose to implement, China could experience a growth rate below the rate of global growth for a decade.
It will be interesting to see what China does after the recent default of the 11 Chaori bond. Will China decide to use reform and prevent a potentially crippling crisis or does China believe that the recent default of the 11 Chaori bond is not a sign of what is to come in the future?