China bond default sparks legal action

A Chaori Solar logo is seen in Beijing. Loss-making Chinese solar equipment producer yesterday said it will not be able to meet interest payments on bonds.

AFP/Beijing

China’s first-ever default on a domestic corporate bond yesterday has sparked legal action by investors owed interest payments from a solar company, their lawyer said.

Shanghai-based Chaori Solar Energy Science & Technology Co said on Tuesday it was unable to make full bond interest payments of 89.8mn yuan ($14.7mn).

Chaori’s board secretary, Liu Tielong, confirmed yesterday that the company was in default, Dow Jones Newswires reported.

The development is being widely described as China’s first ever corporate bond default, but analysts say that it could benefit the market in the long term by raising awareness of risk and making investors more selective.

“The default today is already an established fact,” said lawyer Gan Guolong, who represents investors. “We will definitely help recover bondholders’ interests through relevant legal action.”

Investors had already asked the Higher Court of Guangdong province to order payment from the company, its listing exchange and the lead underwriter for the bond’s initial issue in 2012, he said, but the case was still pending.

Chaori lists both shares and bonds on the Shenzhen exchange in Guangdong.  A commentary issued by China’s official Xinhua news agency late Thursday suggested the government could send a signal by allowing the company to default.

“The episode should help reduce the moral hazard caused by the widespread assumption that an almighty government will always bail out underwater investments with taxpayers’ money,” the commentary said.

“That, after all, is the market playing its own decisive role,” it said, using a catchphrase for economic reforms pledged at a key Communist Party meeting last year.

China’s foreign ministry spokesman Qin Gang said yesterday: “No matter if it is the securities market or the bonds market, it is only natural for there to be some fluctuations.”

Analysts said bond buyers, who are largely retail investors in China, would be hurt but a default would have a positive impact on the country’s corporate debt market.

“Municipal governments and banks in China have stepped in to help distressed companies meet their bond payment obligations during the past few years,” ratings agency Moody’s said in a report yesterday.

“These bailouts have led some investors to overlook the fundamental credit risks in bonds.”

Chaori investors said representatives had also asked the district government in Shanghai, where the firm is located, and the China Securities Regulatory Commission market watchdog to act.

Wang Yong, who invested 1.28mn yuan of his parents’ retirement funds in the Chaori bond, told AFP he was not aware of the risks – but placed the blame on others.

“The Shenzhen Stock Exchange didn’t give us any warning of the risks. The exchange is responsible, just like if we bought fake goods at a shopping mall and the mall was responsible,” he said.

Chaori shares have been suspended from trading on Shenzhen’s small- and medium- enterprise board since February 19. They last traded at 2.59 yuan.

Trouble in China’s solar sector, which has been plagued by falling prices for cells and panels as well as production over-capacity, came to the forefront last year with the collapse of Suntech Power, once the world’s biggest solar firm.

Early this year, worries surfaced in China over other financial products issued by trust companies, which have drawn comparisons to American “junk bonds” of the 1980s.

In one case a $160mn investment product structured by Jilin Province Trust and backed by a coal firm failed to repay capital and interest five times by mid-February.

Separately, a $500mn investment product structured by China Credit Trust avoided default after an unknown party made good on principal payments to hundreds of investors, though they have not received pledged interest.

Meanwhile, China’s commerce minister yesterday warned industries and companies not to over-expand, after the collapse last year of a key unit of the world’s biggest solar firm.  The country’s decades-long boom has turned it into the world’s second-largest economy and a key driver of global growth, but at the same time major internal imbalances have developed.

China’s Suntech Power, once the world’s biggest maker of solar cells and panels, sought market share by driving down prices to levels some competitors claim were loss-making. However, its main Chinese unit, Wuxi Suntech, filed for bankruptcy last March with debts of hundreds of millions of dollars.

“What we should take into account is that some industries should not develop overly fast, particularly expand blindly,” Gao Hucheng told reporters.

“They should not either rely on the foreign market for the majority of their product sales,” he added.

Disputes over solar panels shook trade relations between China and the European Union and US last year, which accuse Beijing of unfairly subsidising the industry.  The sector is still hampered by fallout from overproduction combined with falling prices for cells and panels.

Gao’s comments came at a news conference on the sidelines of the annual session of the National People’s Congress, China’s Communist Party-led parliament.

On Wednesday, Premier Li Keqiang announced a growth target of “around 7.5%” for this year and reiterated the importance of fostering consumer demand.

China’s leadership is vowing to transform the country’s economic growth model away from an over-reliance on often wasteful investment projects and instead make private demand the driver for the country’s future development.

Asked about the Trans-Pacific Partnership (TPP), a huge US-led free trade area currently under negotiation which so far excludes China, Gao said that Beijing has an open attitude to global trade and investment deals.

“We think the TPP is an important negotiation and an FTA of high standard,” Gao said.

“China pays great attention to the progress of the TPP negotiations and is assessing the situations of the talks. We are also maintaining communications with the major negotiating parties.”