Chaori Solar debt warning raises prospect of first onshore China default

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Reports that a Chinese solar cell manufacturer may this week miss an interest payment raises the very real prospect of a first onshore default in China that could prompt investors to reassess, for the first time in nearly two decades, credit risks in the country.

Chaori Solar, a Shanghai-based producer of solar cells for the domestic PV market, issued a statement this week saying it may not be able to make an interest payment of 89.9 million yuan ($14.6 million) in full and in time for tomorrow’s March 7 deadline.

Instead, the company announced in a statement to the Shenzhen stock exchange that it plans to pay just four million yuan to shareholders on the back of a poor 12 months’ trading that has seen the company’s stock drop by 41%.

Chaori Solar’s plight lifts the lid on the underlying strain being exerted on China’s $4.2 trillion bond market. This year, the country’s renewable energy industry must financially meet the maturation of $7.7 billion in bonds. A Chinese state think tank estimates that the country’s debt is currently 215% of GDP – a potentially untenable situation that China Premier Li Keqiang will hope can be salved by solar’s – and other renewable energies’ – continued strong performance.

However, a default from Chaori Solar could undermine confidence in the industry, reckon market experts. "This [will be] the first onshore default," Shanghai-based bond analyst at Guotai Junan Securities Co., Yang Kun, told Bloomberg. "It shows regulators’ attitude toward defaults has changed and they’re silently permitting defaults. Risk appetite will slump substantially."

China has not experienced a default in its publicly traded domestic debt market since 1997, when the central bank started regulating the sector, effectively offering investors a state-backed guarantee for their financial ventures. However, with non-financial firms in China running an average 93% debt ratio last year (compared to an Asia average of just 70%), patience is evidently wearing a little thin.

Ivan Chung, senior credit officer at Moody’s in Hong Kong, told Bloomberg: "If the underwriters or authorities don’t come out with a bailout plan [for Chaori Solar], it’s as good as the first default in China’s public bond market."

Solar anger

Understandably, Choari Solar’s bondholders are unhappy at how the events are unfolding, and have revealed they plan to express their anger to the Shanghai Fengxian local government for not coming to the company’s aid.

In anticipation that no such aid will be forthcoming, plans have been outlined to cut directors’ salaries and suspend all capital expenditure projects in an effort to keep bondholders’ losses to a minimum.

Industry analysts stateside are watching these developments closely, with one expert suggesting that Chaori Solar’s default could become China’s "Bear Stearns moment", with investors in the People’s Republic reassessing their approach to the market.

"We doubt the financial system in China will experience a liquidity crunch immediately because of this default but we think the chain reaction will probably start," commented Bank of America strategists David Cui, Tracy Tian and Katherine Tai.

However, global credit ratings agency Fitch Ratings sees an inaugural onshore China default as a potentially positive development, stating that it will "instill greater discipline to price credit risk more effectively."

Previous defaults from Chinese solar companies have usually been steered through overseas subsidiaries, such as LDK Solar’s recent overseas debt default that was engineered so as to protect the company’s Chinese interests. Meanwhile, China’s SunTech Power Holdings Co. has filed for bankruptcy protection in U.S. courts, maintaining solvency back home.