China saw the default of a domestic corporate bond on Friday, the first in the history of People’s Republic of China. The default comes from Shanghai Chaori Solar Energy Science & Technology Co. as the company failed to make an interest payment of nearly 15 million dollars. The default does not come as a huge surprise as overproduction is a rampant problem in China especially for green energy, “Gross overproduction helps explain why the producer price index, which measures factory gate prices, fell in February for the 24th consecutive month”.
A research report published by Bank of America Merrill Lynch suggested that the default could potentially set off a chain reaction. While many observers believe that the default is too small to have much of an impact only time will tell the reactions of investors. The fact that Beijing is beginning to offer less protection to companies is a result of the slowing economy and is a strong warning to companies that they cannot expect the same level of support as in the past. Already four other debt issuers postponed offerings and nearly 6.6 billion yeah of domestic bond sales have been delayed. Higher rates for financing are expected by many observers. A remarkable fact about the debt situation in China is that while China’s economy is roughly half of the economy of the U.S. the size of China’s corporate debt may exceed that of the United States by the end of the year.
Read More:
http://www.forbes.com/sites/gordonchang/2014/03/09/whistling-past-the-graveyard-after-chinas-1st-ever-bond-default/
2 Comments
Interesting article. Overproduction is a serious problem in China not only for green energy but also for steel and many other products. I wonder if it really is a first default in history though. With the financial system being less transparent and the absence of a well-established credit system, it is hard to gauge the creditworthiness of companies. And many investors blindly put money in high-yield products like trusts despite their high risk.
Refer to this post: http://econ274.academic.wlu.edu/2014/03/china-has-first-corporate-default/
I wrote that the government allowed this default so that it can reduce the “wasteful energy and investment.” This can be considered as a first step of taking the “reforms.”
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