Default expected in corporate bond market

China's corporate bond market is facing its first default on Friday, as a loss-making solar cell and panel producer announced Wednesday that it would not be able to repay the interest on a loan.

The warning by the company, Shenzhen-listed Shanghai Chaori Solar Energy Science & Technology Co, highlighted the rising credit risks in China's $1.5 trillion corporate bond market.

Chaori said in a statement sent to the Shenzhen Stock Exchange Wednesday that it could not repay the 89 million yuan ($14.52 million) in interest on a two-year loan. The interest repayment is due on Friday.

"Because the company's liquidity crisis has not been solved yet, the firm has not obtained sufficient capital to repay the interest out of its own production and operation," Chaori said in the statement.

"The company has tried to gather capital to repay the interest from external sources. But because of various uncontrollable factors, the company only obtained 4 million yuan," it said.

There have not yet been any corporate bond defaults in China, as local governments usually offer bailouts or debt extensions. Last month, a coal company facing difficulties in repaying a 3 billion yuan high-interest loan was bailed out with the assistance of a local government in North China's Shanxi Province.

Zhu Lixu, a Shanghai-based analyst with Xiangcai Securities, told the Global Times Wednesday that China's slowing economy has cut the revenues of many companies and this is one of the major reasons for the imminent default.

"The number of corporate bond defaults will increase in 2014," he said. "But private companies are at greater risk of default than State-owned enterprises (SOEs), which are likely to be bailed out in the end."

Chaori is a private company. The firm announced on Friday that it made a loss of 1.33 billion yuan in 2013, lower than its 2012 loss of 1.68 billion yuan. Trading of its shares has been suspended since July 2013.

Lu Ting, China economist for Bank of America-Merrill Lynch in Hong Kong, said in a note sent to the Global Times Wednesday that a default would actually be "a good thing," since the economy needs defaults to be able to price bonds and other debt products more accurately.

Lu said he does not see a systemic credit crunch coming. "Defaults of some debt products are definitely not on a similar scale to the collapse of a major financial institution… We don't think corporate bonds and incoming trust loan defaults will lead to a credit crunch."

The central government, Lu said, needs to improve its bankruptcy law and legal procedures to aid the healthy development of the corporate bond market, the size of which has grown by more than 10 times in the last six years to reach 8.7 trillion yuan in January.

Zhu, however, said that a default will increase the expectation of credit risks among lenders, making it more difficult for companies to get loans.