Reuters Insider - Will Chaori default spell reform for China's debt markets?

Suntech SA

11/03/2014 04:51

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 http://insider.thomsonreuters.com/link.html?cn=share&cid=1208219&shareToken=Mzo1YTIzMTNiNy0zYWMzLTQ4YjMtOWQ4Zi0zZTBhMzc0MTg1Zjg%3D&playerName=ReutersNews 
                                                                       
 Source:             Thomson Reuters                                   
                                                                       
 Description:        Chaori Solar has made history by becoming the     
                     first Chinese company to miss an onshore bond     
                     payment. But the real reform test will be whether 
                     the government allows even bigger, more systemic  
                     defaults.                                         
 
 
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Transcript (May be auto-generated)

 Living one's mark in the business world is a pretty stock-standard dream for 
many company leaders. That's exactly what green energy manufacturer Chaori 
Solar's managed by delivering the first onshore bond default in modern Chinese 
history. They did that by skipping out on a $15 million interest payment. 
Chaori's a victim of overcapacity in the solar panel market. A glut of 
productions sent global panel prices tumbling for a couple of years before 
recovering. It's also what happened to Chaori's share price. You can see it fell
some 40% in 12 months prior to suspension in February, no uptick there. But it's
all alone in its suffering. Solar panel peers Suntech and LDK have previously 
defaulted on debt, but of course, that was an offshore issuance. The reason we 
care about Chaori is because of the message it sends to the onshore market. The 
state is heavily involved in business in the world's second largest economy and 
at times, that's extended to bailing out failed trusts or bonds like Shandong 
Hualong's near brush with default last April. But that implicit guarantee has 
led to a market mispricing of real risk which means effectively good bonds 
subsidize bad ones, according to Bank of America Merrill Lynch's Ting Lu. If 
Chinese investors believe that all their investment are safe, then they don't 
know how to price risks. But the message here is that the Chinese government 
won't bail out all those bond investors and they should be responsible for 
themselves. Chaori's financial distress certainly isn't unique. Among 
Shenzhen-listed firms, more than a few show absolutely brutal short-term 
debt-to-cash ratios which is a sign of very tight liquidity. For reference, 1:1 
would be a healthy number on this chart. Allowing defaults for onshore bonds is 
new and it does indicate the government may be getting serious about building a 
more market-based economy. But Chaori is still a pretty small fry. With more 
than a few bond payments due from distressed Chinese companies later this year, 
the question now is whether Beijing will stick to its guns when a bigger default
comes along