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March 5 (The following statement was released by the rating agency)
Fitch Ratings believes that the likely first default of a Chinese corporate onshore bond will be positive for the market in the long term as it will instil greater discipline to price credit risk more effectively. Shanghai Chaori Solar Energy Science and Technology Co., Ltd. (Chaori) has warned it will not make in full a CNY89m interest payment due 7 March 2014 on an onshore interbank bond with a March 2017 maturity.
Chaori's expected default coincides with the annual National People's Congress, a meeting of China's political leadership. That the Chaori default has been allowed to emerge may signal a shift in the government's stance towards a greater tolerance of outright corporate defaults. Chaori's bonds have a large retail investor base, which makes the case even more noteworthy.
In the recent years, local governments have intervened several times to prevent defaults in the onshore corporate credit market in order to maintain economic and social stability. In particular, corporate bond defaults have been prevented because China has a keen interest in expanding its onshore bond market.
The onset of an outright default is likely to lead to a re-pricing of corporate credit risk as the common perception that the government will bail out all struggling companies falls away. Weaker Chinese corporates may therefore see an increase in their onshore borrowing costs. Fitch expects a reduction of onshore lenders' and investors' risk appetites, which could pressure frailer companies' liquidity, especially in sectors challenged by cyclical downturns and persistent capacity surpluses.
We see onshore corporate credit defaults as a long-term positive for China's financial system as it should instil greater market discipline and lead to a more efficient allocation of capital among corporate borrowers. It may also prompt further regulatory progress to provide more clarity on the legal process governing domestic bankruptcies and restructuring, which should benefit both onshore and offshore creditors in the long run.
We expect Chaori's default to have relatively limited impact on Chinese corporate issuers of offshore debt, although the credit risk premium could widen modestly in the short term. Compared with the onshore market, the offshore market has a higher degree of sector and individual company differentiation in pricing.