China’s Problem with Defaulters

7 Mar

Shanghai Chaori Solar Energy Science & Technology are set to become the first Chinese firm to default on their interest payment owed on their corporate bond. The £8.7 million interest payment on the £100 million bond issued in 2012.

Leland Miller of research firm China Beige Book has claimed that investors are preconditioned to understand that these risks are not present in China. The government in China has been known to bail out firms that might be close to trouble. This is why investors were confident about investing in corporate bonds; the knowledge of China’s very forgiving government. They have created a market failure; moral hazard. Firms and investors have no incentive to make precautions to protect themselves against risk. The Chinese government is having a change of heart.

In the market for Solar energy, the number of firms is very high due to local government support. This has meant a drop in prices and has claimed its first victim.

China would argue that this is not going to greatly change investing patterns, however it will create a dent in the otherwise gleaming reputation in reliable Chinese firms.

http://www.bbc.co.uk/news/business-26464901

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