China’s domestic bond market is readying for its first-ever default this Friday, and this ignominious milestone is coming courtesy of—who else?—one of the country’s struggling solar firms. Chaori Solar announced this week that it will be unable to pay the nearly $15 million in interest it has run up on $163 million in bonds it was issued two years ago.This a two-part story. First and foremost, it illustrates the poor health of the country’s solar industry, which has won the global race to the bottom in panel manufacturing, largely thanks to cheap government money. The state support led to an overproduction of panels, and the resulting glut has had many manufacturers selling their products at a loss. Greens cheer this steady decline in panel pricing, ignoring the fact that the market is wildly distorted, the product subsidized by different nations at every step in the supply chain.But there’s more to this than just the failings of the solar industry. As the FT reports, this impending default could be the first domino to fall in China’s overextended domestic bond market:
A default could raise the risk profile associated with corporate bonds, raising yields and slowing down issuance at a time when fixed asset investment growth in the economy is already slowing. It would also mark the first default by a publicly traded bond since the Chinese central bank began regulating the market in the late-1990s.Given the size of the Chinese corporate debt market, the knock-on effect from a default could be material. A Thomson Reuters analysis of 945 listed non-financial companies found that total debt rose from Rmb1.82tn to Rmb4.74tn, between 2008 and 2013. Standard & Poor’s estimates the Chinese corporate debt market reached $12tn at the end of 2013.
Bank of America Merrill Lynch economist Lu Ting thinks this could just be the tip of the iceberg for Chinese defaults: “We believe the chance of some bond and trust loan defaults will rise significantly in 2014, especially as the more confident government sees the need for some defaults to develop a more disciplined financial market.” Some observers believe this could be a chance for Beijing to institute needed reforms to its corporate bond market, but things could get worse before they get better. The bill for recklessly pursuing first mover advantage in solar production finally looks to be coming due.