China allows bond to default

Chaori Solar Energy Science and Technology was trying to raise money from sales of overseas assets to meet payment obligations worth 89.8 million yuan (10 million euros) for a corporate bond, the Shanghai-based solar panel maker said Friday.

According to Dow Jones Newswires, Chaori's Board Secretary Liu Tielong had confirmed on Friday that the company was in default on paying interests for the bond after the government had reversed an initial decision to step in.

Beijing's decision has prompted the first-ever default on a domestic corporate bond in China. China's official Xinhua news agency said in a commentary late on Thursday the move reflected the market playing its own decisive role.

"The episode should help reduce the moral hazard caused by the widespread assumption that an almighty government will always bail out underwater investments with taxpayers' money," the commentary said.

Analysts see the government's decision as a landmark in the ruling Communist Party's financial market liberalization under new economic policy. International ratings agency Moody's said it would come as a wake-up call and advance growth of China's bond market.

"Credit risk would play a more important role in pricing, thereby making the bond market more efficient in the allocation of capital," Moody's senior credit officer Ivan Chung said in a statement.

Chung also said that municipal governments and banks in China had frequently stepped in to help distressed companies meet their bond payment obligations in the past few years. The bailouts, however, had led some investors to overlook the fundamental credit risks in bonds, he added.

Chaori Solar is not the first Chinese company falling victim to slumping prices and production overcapacity in the country's solar sector. In March last year, Suntech Power - once the world's biggest maker of solar cells and panels - filed for bankruptcy with debts of hundreds of millions of dollars.

uhe/kms (AFP, dpa, Reuters)