A Chinese solar company just announced that it will miss an CNY89.9 million interest payment on a CNY1 billiion bonds. Currently $US1.00 equals 6.13 Chinese Yuan (CNY).
This marks the first major default in China’s bond market.
While this might be bad news for the bondholders, the big picture thinkers see this as an encouraging development for China’s developing financial markets.
“[W]e think it’s a good thing as a normal economy needs defaults to better price bonds and other debt products,” said Bank of America Merrill Lynch’s Ting Lu. “Let’s not underestimate Chinese onshore investors’ resilience. Defaults of some debt products are not on a similar scale to a collapse of a major financial institution.”
“We judge the systemic risk to the overall bond and financial markets from this potential default to be small,” said Barclays’ Jian Chang. Here’s more:
A default should encourage greater differentiation in the credit market and better priced credit risks. Sentiment in the high-yield bond market could be hurt by a default, but ‘risk-free’ assets would likely be supported given the currently easer liquidity conditions. We’ve noted that credit spreads have widened, with risk-free government bond yields falling at a much faster pace than corporate bonds, before 10 February as the liquidity risk premium eased notably. Assuming a default does happen, we think the credit risk premium will likely become more important. As this would also be the first default by a privately-owned company, we think onshore market participants will likely start to distinguish more between corporate and local government investment vehicle debt (eg local governments have more resources and large assets), SMEs and large company debt, and private company and state-owned company debt.
Chang included this chart breaking down the Chinese bond market.