By Wang Zichen (
Xinhua) 07:16, March 07, 2014
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Comments twitter facebook Sina Microblog reddit Much ink has been spilled on the alleged first default of a Chinese corporate onshore bond,but an inappropriate analogy likening it to the infamous Bear Stearns moment couldn't befurther off the mark.
The Shenzhen-listed solar maker Shanghai Chaori Solar Energy Science & Technology Co.announced on Tuesday night that it could not fully service an 89.8 million yuan interestpayment due Friday. Three analysts with Bank of America Merrill Lynch (BAML) called itChina's "Bear Stearns moment" in a research note the next day, and the judgement callsoon made headlines at Bloomberg and some other media outlets.
But only hours before the scare-mongering, another report from BAML said the defaultwas "not on a similar scale to a collapse of a major financial institution."
The author had a more positive take, saying such a default helps better price bonds andother debt products. The report also asserted that China's onshore investors are resilientenough to absorb its impact.
Indeed, it is hard to grasp how a potential default of the bond - 163 million U.S. dollars inprincipal and rated as junk by Shenzhen-based Pengyuan Credit - could be likened to thesystemically important investment bank Bear Stearns with hundreds of billions of dollarson its balance sheet at the time.
BAML's diverging views aside, economists from other financial institutes took a morecautious tone.
Fitch Ratings saw the default as having "relatively limited impact on Chinese corporateissuers of offshore debt." It also added that the default issued within the Chinese mainland"should instill greater market discipline and lead to a more efficient allocation of capitalamong corporate borrowers."
Fitch also noted the default came at a time when lawmakers met in Beijing for thecountry's annual parliamentary session. On Wednesday, Premier Li Keqiang reiterated thetop leadership's pledge to allow market forces to play the "decisive role" in the economy.
The perception that the government will provide a backstop for debt products on the vergeof default is plainly against the spirit of a maturing market economy, and simplyunsustainable considering the looming size of China's increasingly sophisticated financingmethods, which have channeled money to industries saddled with overcapacity, such assteel, cement, and solar.
Chaori also has not ruled out the option of seeking funding to meet its obligations. But if adefault does occur, the episode should help reduce the moral hazard caused by thewidespread assumption that an almighty government will always bail out underwaterinvestments with taxpayers' money.
That, after all, is the market playing its own decisive role.
（Editor：GaoYinan、Yao Chun）
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