China Default Risk at 5-Week High as Li Speaks After Chaori

Chinese Premier Li Keqiang said that defaults may be unavoidable in some cases, after the first such occurrence in the country’s onshore bond market drove credit risk to a five-week high.

Credit-default swaps to protect Chinese sovereign bonds from non-payment for five years climbed to 95.8 basis points yesterday, the highest since Feb. 5, according to prices from data provider CMA. China is paying great attention to financial risk and is monitoring threats from so-called shadow banks, Li said in a press conference today in Beijing.

Shanghai Chaori Solar Energy Science & Technology Co., a maker of solar cells, became the country’s first company to default on onshore notes when it failed to make a full coupon payment on March 7. Premier Li must balance efforts to rein in excessive borrowing in China with steps to sustain economic growth set to cool to a more than two-decade low of 7.5 percent this year, according to the median estimate in a Bloomberg survey.

“We could see more defaults, not limited to solar companies but also in industries with excess capacity like steel and mining,” said Steve Wang, head of fixed-income research in Hong Kong at BOCI Securities Ltd. Trust products may also face defaults, he said.

‘Enhance Monitoring’

Chaori Solar’s default last week is stoking speculation more companies may miss debt payments in China’s $4.2 trillion bond market after the government pledged to let markets take a “decisive” role in the economy. The default represents a “wake-up call” for investors to reassess credit risks and capital allocation, according to Moody’s Investors Service. It came amid official data signaling manufacturing and exports in the world’s second-largest economy are cooling.

“Some individual cases may be unavoidable,” Premier Li said, referring to defaults of financial products. “We must enhance monitoring and ensure timely handling to make sure that there are no systemic or regional financial risks,” he said at the briefing in Beijing today after the end of the legislature’s annual meeting. The ratio of government debt to the size of the economy is below an internationally-recognized danger level, Li said without specifying the level.

Industrial Production

China’s industrial production rose 8.6 percent in January and February from a year earlier, the National Bureau of Statistics said today in Beijing, compared with the 9.5 percent median projection of analysts surveyed by Bloomberg News.

The spread on five-year AA- notes over similar-maturity government notes reached 363 basis points on March 7, the widest since Feb. 25, according to Chinabond indexes. Ratings of AA- or below are equivalent to non-investment grades globally, according to Haitong Securities Co., the nation’s second-biggest brokerage. The spread is down from 418 basis points on Feb. 7, which was the highest since 2012.

While bond investors may avoid securities sold by “fundamentally weak” private Chinese companies following the Chaori default, it shouldn’t diminish strong demand for notes issued by state-owned enterprises, Moody’s said in a report today.

Haitong said in a research note last week that debentures sold by Baoding Tianwei Baobian Electric Co. and Sinovel Wind Group Co. are among onshore bonds with the highest credit risk.

Calls to both companies today went unanswered.

The 2018 notes of Tianwei Baobian Electric, which also makes solar-cell parts, fell 17.71 in the past year to 82.19 as of March 10, according to exchange data. The bonds were suspended on the Shanghai Exchange from March 11, after the manufacturer said losses widened to 5.23 billion yuan ($852 million) in 2013 from 1.55 billion yuan in 2012.

The December 2016 notes sold by Sinovel with a 6 percent coupon fell for a fourth day today to 84.56 percent of face value as of 3:19 p.m. in Shanghai from 87.65 percent on March 7, according to Shanghai Exchange prices.

The solar industry is “pretty risky,” and Chaori’s default “has definitely caused some impact in terms of widening bond spreads,” BOCI Securities’ Wang said.

— With assistance by David Yong, and Judy Chen

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