Historic default looms at Chaori

Chaori Solar, a tier 2 Chinese PV manufacturer, has emerged as a pawn in Beijing’s attempt to tighten the screws on the loose money flowing through China’s economy, as the company looks set to default tomorrow on its yuan-denominated bonds.

A number of Chinese solar companies – among them Suntech Power Holdings and LDK Solar – have missed or postponed payments owed to overseas bondholders in the past year.

But Chaori, whose shares trade on the Shenzhen Stock Exchange, would be the first Chinese company to default on its domestic bonds since China’s central bank began regulating the country’s debt market in the late 1990s.

Chaori is due to pay out 89.9m yuan ($14.7m) in interest payments on 7 March, related to 1bn yuan worth of bonds it sold in March 2012. The company this week told investors it may miss the payment due to “various uncontrollable factors”.

Last year Chaori just missed defaulting on its bonds after the local government convinced its creditors to postpone their claims, according to reports.

Financial analysts believe Chaori’s default could represent a tipping point for China, with Beijing using the company’s predicament to teach investors a lesson, in a country where yields attached to debt instruments often seem to have little correlation to risk – the result of loose money and the sense that the government will always bail companies out.

The fact that Chaori’s bonds reportedly have a large base of retail investors makes the situation all the more remarkable.

Chaori, which claims on its website to have 1,500 employees, swallowed a net loss of 1.33bn in 2013 – its third straight annual deficit.

Although little known outside of China, Chaori is not an insignificant player within China’s solar industry. Two years ago it was one of 12 companies chosen by the China Development Bank to continue receiving prioritised financial aid – due to its having “independent” intellectual property – even as less relevant companies were left to wither on the vine.