Shanghai Chaori Solar Energy Science & Technology Co (Chaori Solar), a Shenzhen-listed solar equipment manufacturer, halted exchange trading Monday of its 11 Chaori Bond after posting annual losses during 2011 and 2012, a development which again raises the possibility that China's first bond default could be on the horizon.
Under Chinese securities regulations, corporate bonds are eligible for suspension from mainland exchanges if their issuers experience financial losses for two consecutive years. In the event of a third straight year in the red, it will be up to listing committee officials to decide whether a suspended bond is permanently barred from trading at local bourses.
Many Chinese market participants have been closely following Chaori Solar's ongoing financial woes to see how far authorities will go to keep the beleaguered manufacturer afloat.
To date, officials have always made sure that cash-strapped enterprises can repay their bond investors; although some say that recent efforts aimed at strengthening China's capital market mean that debt issuers could soon be left to sink or swim on their own.
On December 29 2012, Chaori Solar declared that it had failed to repay 380 million yuan ($61.97 million) in overdue bank loans and owed some 90 million yuan to three of its suppliers, an announcement which sparked concerns that a default on the company's debt securities was imminent. Chaori Solar allayed these fears the following month, when it revealed that it had recently reached an equity transfer agreement with a State-owned company.
Since these events, Chaori Solar has submitted several filings cautioning investors about the risks posed by its debt products. But as repeated warnings pushed the company's bonds closer toward junk status, speculative investors began moving in ahead of an expected bailout - the price of the 11 Chaori Bond jumped 3.78 percent on July 2, a day which saw the company issue another risk warning to the market.
"Some investors are essentially gambling by ignoring risks under the assumption that the Chinese government will continue heading off bond defaults," Hao Yijun, a Shanghai-based trader at China Guangfa Bank, explained to the Global Times.
Hao went on to say that a default-free market is inherently immature, and the government's actions have only bred unhealthy investing habits.
In 2012, the Weifang municipal government in Shandong Province stepped in to prevent Shandong Helon Co, a producer and distributor of textile products, from defaulting on its bonds. Last year also saw local authorities in Jiangxi Province repay the trust loans of LDK Solar, a US-listed solar equipment manufacturer.