Added bloombergs


The company said on March 4 it will only be able to pay 4 million yuan ($653,990) of an 89.8 million yuan coupon due today on the notes.

Chaori Solar may become China’s own “Bear Stearns moment,” prompting investors to reassess credit risks as they did after the U.S. securities firm was rescued in 2008, according to Bank of America Corp.

“We may see other bonds default this year,” said Li Ning, a bond analyst in Shanghai at Haitong Securities Co., the nation’s second-biggest brokerage. “If it’s a default by a financial institution, it may turn into an extreme situation somewhat like the collapse of Lehman Brothers.”

‘Zombie’ Companies

Some “zombie” companies in China with cash shortages will fail as authorities end overly loose monetary policy, Xia Bin, an adviser to the State Council and former central bank board member, said on Feb. 10.

Soaring Debt

Total debt of publicly traded non-financial companies in China and Hong Kong has surged to $1.98 trillion from $607 billion at the end of 2007, according to data compiled by Bloomberg. Some 63 have a debt-to-equity ratio exceeding 400 percent, compared with the average of 73 percent. Renewable energy, materials, household appliances and software companies dominate the rankings.

“There will be more defaults in China’s onshore bond market,” said Qiu Xinhong, a bond fund manager in Guangzhou at Golden Eagle Asset Management Co., which oversees 13.9 billion yuan in assets. “The next default will be likely to happen in overcapacity industries, such as steel, nonferrous metals and coal. Bond investors will shun private companies with heavy debt burdens because they’re the most at risk.”

‘First of Many’

China Citic Bank won’t help Chaori Solar make any interest payment on its bonds because they weren’t guaranteed, the 21st Century Business Herald reported March 6 on its website, citing an unidentified person from the lender. An earlier liquidity support agreement between the bank and the company can’t be interpreted as a bond guarantee, the report said.

“This will likely be the first of many defaults, although I don’t think it’s going to cause a cascading effect,” said Brian Coulton, a global emerging-market strategist in London at Legal & General Investment Management, which manages some 450 billion pounds ($753 billion) globally. “Short term, we’re likely to see higher bond yields but in the long term, this will create a better market for pricing credit risk.”

People’s Bank of China adviser Chen Yulu said today that default risks for trust products in the country are under control and aren’t systemic, the official Xinhua News Agency reported.

“This is the first default in a relatively new bond market with limited spillover effects,” Hans Stoter, the chief investment officer at ING Investment Management Co., said in an interview in Singapore today. “It’s an important test to see the workout process and what losses will be incurred by domestic investors. We’re watching with great interest.”


The number of Chinese companies with debt double equity has surged since the global financial crisis, suggesting the first onshore bond default won’t be the last.

Chain Reaction

While any Chaori default likely won’t prompt an immediate liquidity crunch in China, it may lead to a chain reaction, Hong Kong-based strategists David Cui, Tracy Tian and Katherine Tai at Bank of America wrote in a March 5 note. It took a year for the U.S. financial crisis to escalate, they said.

Contagion has been avoided so far. China Credit Trust Co. last month repaid principal while giving only partial interest payments to holders of the Credit Equals Gold No. 1 product after a coal miner it lent money to collapsed, while other trusts have had to defer payouts.

Credit-default swaps insuring China’s debt against non-payment have jumped 23 basis points in the past year to 85 basis points. The extra yield investors demand to hold five-year AA-corporate notes in China over similar-maturity government bonds widened seven basis points to 356 basis points on March 5, the biggest increase since November. It reached 361 basis points yesterday, down from 418 on Feb. 7, the highest in almost two years.

The one-year swap rate, the cost of fixing the floating seven-day repurchase rate for 12 months, reached a record high of 5.38 percent on Jan. 2 and has since eased to 4.42 percent amid speculation the central bank wants easier conditions for companies to pay debt. China’s renewable energy industry alone faces a record $7.7 billion in bonds maturing this year.

Four companies pulled domestic bond sales on the Chaori news. Suining Chuanzhong Economic Technology Development Co. will delay a 1 billion yuan offering due to “serious fluctuations in the bond market,” it said on ChinaBond’s website March 5. Taizhou Kouan Shipbuilding Co., Xining Special Steel Group and Qunsheng Group Co. scrapped offerings for similar reasons.

“In the long term, investors will be more cautious and see that returns also reflect risks, which will benefit the development of the rates and bond market,” said China Chengxin International’s Zhang. “The past distorted relationship between returns and risks can then be corrected.”


UPDATE: It’s happened – China has suffered its first domestic corporate bond default as Chaori fails to meet interest payments on schedule and rather more surprisingly failed to receive a last-minute mysterious or otherwise bailout…


But hey don’t sweat it, Moody’s think it’s great news…


Maybe tell the issuers that couldn’t get their deals off today!!!

Of course what they mean is – maybe the market will finally start pricing in some real risk…

“Over the past few years, municipal governments and banks in China have stepped in to help distressed companies meet their bond payment obligations. These bailouts have led some investors to overlook the fundamental credit risks in bonds,” says Ivan Chung, a Moody’s Vice President and Senior Credit Officer.



“A default would likely make investors recalibrate their risk-return consideration for onshore bonds. Credit risk would play a more important role in pricing, thereby making the bond market more efficient in the allocation of capital,” adds Chung.


Chinese stocks are not happy


Wondering who’s next? We explained here…


and there are a lot to come…


As Bank of America reports in an analysis by David Cui, the Trust defaults are about to get hot and heavy. To wit:

We believe that during April to July the market may see many trust products threatening to default, especially those related to coal mines. By our estimate, the first real default most likely could happen in May with a Sichuan lead/zinc trust product worth Rmb140mn. This is because the product is relatively small (so the government may use it as a test case), the underlying asset is not attractive (so little chance of 3rd parties taking it over) and we also have heard very little on parties involved trying to work things out. Whether this will trigger an avalanche of future trust defaults remains to be seen and this presents a key risk to the market in our opinion.

Ever since the specter of the first real domestic default on a Chinese corporate bond hovered over the markets, the Chinese credit markets have been leaking lower. The last 3 days have seen the biggest drop in Chinese credit markets in almost 4 months. That situation, wistfully occurring half way around the world while US equity markets press on to ever more exuberant (and ignorant) heights, meant at least 3 other Chinese firms pulled their bond issues today and, as Reuters reports, has “triggered widespread upheaval in the bond market.” Banks are awash with liquidity (as indicated by low repo rates) but clearly unwilling to lend and external investors are now running scared.


The Chinese corporate bond market has suffered considerably in the last few days…

Even as repo rates have dropped (and CNY has strengthened) – repo rates at multi-month lows, CNY strengthening and stocks weak…


and SHIBOR at multi-month lows (suggesting plenty of liqudity at the banks but as we see below, a clear unwillingness to lend)…

And that has led to pulled issues…

Via Reuters,

The threat of China’s first domestic bond default has prompted Suining Chuanzhong Economic Technology Development to delay a one billion yuan ($164 million) debt issue and two other companies have halted deals blaming market volatility.



The run-up in corporate debt since 2008, and overcapacity in sectors such as steel, coal and solar energy, have threatened the solvency of many borrowers.


Chuanzhong said late on Wednesday that the news that Chaori Solar was set to miss a coupon payment on Friday “triggered severe upheaval in the bond market”, so it had delayed its bond deal.


Taizhou Kouan Shipbuilding postponed a 300 million yuan issue of short-term commercial paper, while Xining Special Steel cancelled a 470 million yuan offering of medium-term notes, the companies said.


The deals are relatively small, but the delays underline the risk that an unprecedented default will make it harder for other companies to access capital.



Yields on corporate and enterprise bonds pushed higher after Chaori Solar’s announcement. Five-year AA rated notes rose 8 basis points to 7.77 percent, the biggest increase since November 15, ChinaBond data showed.

This situation is being exacerbated as the lending is being cut to the indistries with the most slack – with the result (as we warned about in the past) that commodity-based collateral for all the shadow loans is getting hammered (through no real demand) and crushing the credit system (through haircuts and forced deleveraging as collateral values collapse)…

This is very negative for the Chinese economy which now more than ever is reliant on credit as its growth-driver… and the China credit-crisis indicator remains flashing red (2Y Swap – 2Y Bond spread)…



China On The Verge Of First Corporate Bond Default Once More

While everyone was focusing on the threat of tumbling debt dominoes in China’s shadow banking sector, a new threat has re-emerged: regular, plain vanilla corporate bankruptcies, in the country with the $12 trillion corporate bond market (these are official numbers – the unofficial, and accurate, one is certainly far higher). And while anywhere else in the world this would be a non-event, in China, where corporate – as well as shadow banking – bankruptcies are taboo, a default would immediately reprice the entire bond market lower and have adverse follow through consequences to all other financial products. This explains is why in the past two months, China was forced to bail out not one but two Trusts with exposure to the coal industry as we reported previously in great detail. However, the Chinese Default Protection Team will have its hands full as soon as Friday, March 7, which is when the interest on a bond issued by Shanghai Chaori Solar Energy Science & Technology a Chinese maker of solar cells, falls due. That payment, as of this moment, will not be made, following an announcement made late on Tuesday that it will not be able to repay the CNY89.8 million interest on a CNY1 billion bond issued on March 7th 2012.

FT reports:

The company has until March 7th to repay the interest, charged at an annual 8.98 per cent, the company said in a statement. “Due to various uncontrollable factors, until now the company has only raised Rmb 4m to pay the interest,” it said in the statement.


Trading in the Chaori bond, given a CCC junk rating, was suspended last July because the company suffered two consecutive years of losses. The company had a further RMB1.37bn loss in 2013, according to the results it posted on the exchange.

Just pointing out the obvious here, but how bad must things be for the company to be on the verge of default not due to principal repayment but because two years after issuing a bond, it only has 4% in cash on hand for the intended coupon payment?

Furthermore, as noted previously, China has so far been able to kick the can on its defaults for nearly three decades. Which is why suddenly everyone is focusing on this tiny company: Chaori Solar’s default – if it transpires – would mark the first time a company has defaulted on publicly traded debt in China since the central bank began regulating the market in the late 1990s. Bloomberg adds, citing Liu Dongliang, Shenzhen-based senior analyst at China Merchants Bank, that such a default would be the “first of a string of further defaults in China.”  FT continues:

Though the bond is relatively small, a default could deliver a sharp shock to risk management strategies in China vast corporate debt market, estimated by Standard&Poor’s to be $12tn in size at the end of 2013.


Any default could also slow down new issuance. A Thomson Reuters analysis of 945 listed medium and large non-financial firms showed total debt soared by more than 260 per cent, from Rmb1.82tn to Rmb4.74tn, between December 2008 and September 2013.


In January, a Chinese fund company avoided a high-profile default, reaching a last-minute agreement to repay investors in a soured $500m high-yield investment trust, in a case that had sent tremors through global markets.

Then again, those who follow China’s bond market will know that Chaori’s failure to pay interest would not really be the true first Chinese corporate default: recall as we reported almost exactly a year ago:

For the first time, a mainland Chinese company has defaulted on its bonds. SunTech Power Holdings has been clinging on by its teeth but after failing to repay $541mm of notes due on March 15th – and following four consecutive quarters of losses through the first quarter of 2012 and since then having failed to report quarterly earnings – owed to Chinese domestic lenders, the firm is restructuring. As Bloomberg reports, Chinese solar companies are struggling after taking on debt to expand supply, leading to a glut that forced down prices and squeezed profits – and most notably were unable to renegotiate its liabilities and obtain “additional flexibility” from creditors. This is highly unusual and perhaps is the beginning of a trend for Chinese firms.

So yes: a prior default, and one by a solar company no less. However, going back down memory lane again, ultimately Suntech had the same fate as all other insolvent corporations in China do – it got a post-facto bailout:

Struggling Chinese solar panel maker Suntech Power Holdings Co Ltd is set for a $150 million local government bailout, a step towards tackling its $2.3 billion debt pile that is at odds with Beijing’s effort to wean the sector off state support. The lifeline comes from the municipal government of Wuxi, an eastern city where Suntech’s Chinese subsidiary is headquartered, and follows Shunfeng Photovoltaic International Ltd’s signing of a preliminary deal to buy its bankrupt Chinese unit.

Curious why China’s local government continues to balloon at an exponential pace, and has doubled in roughly two years to roughly CNY20 trillion (that’s the real number – the official, made up one is CNY17.9 trillion or $3 trillion)? Because just like the Fed and ECB are the ultimate toxic bad banks in the US and Eurozone, respectively, in China all the bad debt ultimately disappears under the comfortable carpet of the broad “local government debt” umbrella. However, things like these must never be discussed in polite public conversation. Which is why despite what Guan Qingyou, an economist with Minsheng Securities said in his Weibo account that the “first default might not be a bad thing even that means more defaults might happen, because it is ultimately good for the market reform”, the reality is that once the dam breaks, it may well be game over for a country that only knows one thing – how to kick the can ever further.

There are additional considerations: As the FT also notes, “given the squeeze on credit supply already seen in January this year, corporate debt defaults could further slow momentum in China’s fixed asset investments.” In other words, the just announced 7.5% GDP target revealed ahead of the National People’s Congress will be impossible to achieve, should China be unable to fund the Capex to build its burgeoning ghost cities, should rates spike.

Which is why this too default will ultimately be made to disappear.

And the next one, and the one after that, because “now” is never the right time to make the right, but difficult decision.

But how much longer can China avoid reality? Not much if one consider this just crossed headline on Bloomberg:


Recall coal is the industry that China’s near-bankrupt Trusts have most of their exposure to.

And then there are our four favorite charts confirming the dire situation in China’s credit market:







For those who need a refresh course on why the Chinese situation is rapidly going from bad to worse, read these several most recent comprehensive articles on the topic:

Bank of America warns further that a more confident government means the start of defaults

With amazing speed in consolidating power in 2013, a more confident President Xi Jinping and team are expected to push for a wide range of reforms. 2014 will be the year for China seriously cleans up mounting local government and corporate debts which have been rapidly accumulated since late 2008. We believe the chance of some bond and trust loan defaults will rise significantly in 2014, especially as the more confident government sees the need for some defaults to develop a more disciplined financial market