If a bond defaults when few people close by are paying attention, should it cause a stir? Shanghai Chaori Solar Energy has said it cannot pay Rmb89.8m ($14.6m) in interest due on Friday. Assuming disaster is not averted, it will become China’s first onshore corporate bond default. The first of anything can be a big deal, especially to overseas China-watchers scarred by the west’s financial crisis where small events did presage wider turmoil. But this one – should it happen – would be most welcome.
Turmoil is produced by the unexpected, not the well-flagged. Chaori Solar warned of default last year but was bailed out when its banks rolled over loans. Its bonds were also suspended from trading in Shenzhen last year. And the struggles of China’s solar-panel makers were hardly a state secret. LDK Solar and Suntech are both restructuring. The welcome surprise will be if Chaori is allowed to default since to properly price risk, investors need to factor in a probability of failure. The danger then is not non-payment, but that someone pays up for Chaori. In January a small but high-profile investment trust received a late bailout. Last month Liansheng Resources, a coalminer, was rescued. In both cases the rescuers were murky coalitions of connected parties. Neither event did anything to improve trust in the processes governing China’s financial system.
An unmanageable wave of defaults would also be in no one’s interest, but nor is it likely: this is China. The biggest risk to a financial system is a lack of trust engendered by collapses rather than the events themselves. That Moody’s considers half its rated Chinese corporate debt to be investment grade might surprise some, but it will not comfort anyone who fears shadow banking or China’s record of rolled-over debt. Chaori’s default could be the first sign that bad loans are being dealt with. Here’s hoping.
