China just let part of a state-owned company default for the first time ever

Chinese flag mask boyREUTERS/Jason LeeA boy wearing a Peking Opera mask waves a Chinese national flag on Beijing’s Tiananmen Square, March 1, 2011.

China’s Baoding Tianwei Baobian Electric just became the first state-owned business to default on onshore Chinese debt according to Reuters — that’s a bad news landmark for China’s economy, which is struggling to cope with a slowdown in growth.

The company is owned by Baoding Tianwei Group, a larger power company.

The subsidiary had bond interest payments to make Tuesday but could not raise the funds to meet them.

The default will likely raise fears that China will allow other state-owned companies to default — which may have accessed cheaper credit on the assumption that they had the implicit support and backing of Beijing. If investors start to think that isn’t true, there could be turmoil in the country’s bond markets.

On Monday there was another default, of Kaisa, a real estate developer listed on the Hong Kong stock exchange. It was the first time that a developer had been unable to pay interest on dollar-denominated bonds.

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