More defaults seem inevitable in the huge domestic bond market as the slowing economy squeezes profits and the government pledges less intervention.
So far this year, there have been defaults by a restaurant chain, a property developer and a state enterprise.
Power equipment manufacturer Baoding Tianwei Group Co. made history last week, with the dubious honor of becoming the first state-owned enterprise (SOE) to default on its debt.
The company, a subsidiary of a major defense contractor, missed a payment of 85.5 million yuan (14 million U.S. dollars) due on 1.5 billion yuan of bonds after booking a loss of 10.1 billion yuan in 2014.
The default was relatively small, but analysts greeted it with a certain amount of celebration. It is seen as a landmark for market discipline in the corporate bond market. Investors have long assumed that SOEs, with the government behind them, would never default.
Now the market knows that SOEs are no longer shielded and more could be allowed to default, said Fitch Ratings' Wang Ying in Shanghai.
The government has pledged a "decisive role" for the market, and in March, Premier Li Keqiang said the government would only prevent a systemic collapse and individual cases of financial default would be allowed to run their course.
Tianwei illustrates the government's intention of allowing isolated financial risks and giving market forces more say. It is a relatively small, non-listed SOE in a fully market-driven sector with low strategic importance to its larger, stronger SOE parent, Wang said.
Rather than hurting the market, allowing SOEs to default will "instil credit discipline and facilitate capital reallocation", Wang said.
The post-default plan for Tianwei remains unclear. Over the weekend, media reports said China Construction Bank would come to the rescue, but there has been no confirmation from the bank.
The default came one day after another default milestone, when real estate developer Kaisa Group Holdings became the first Chinese company to default on a U.S. dollar-denominated bond.
In March last year, the onshore bond market had its first private company default: Shanghai Chaori Solar Energy Science and Technology C. In that case, investors were generally paid in full, thanks to a bail out by a state-owned bank.
Guan Qingyou, executive director of Minsheng Securities research institute, expects more defaults as economic growth slows, certain sectors grapple with high debts and the government makes good on its intention to phase out "rigid repayment".
China is one of the world's largest corporate bond markets, but defaults have been kept at bay as the government implicitly guarantees debt repayment and comes to the rescue.
Ji Zhibin, a finance professor at Zhongnan University of Economics and Law, believes that allowing more defaults will end the expectation of "rigid repayment" and stimulate tolerance for defaults, as long as there is no systemic or regional fallout.
The government is unlikely to end its cautious stance on defaults of large monetary value, or those that involve large corporates in strategic sectors, or those that may hurt a large number of retail investors in the near term, Wang Ying said.
