China’s First Onshore Default!

So it appears that the Chinese government won’t be bailing out every credit delinquent companies that surfaces. So the first default for the the year of horse.

From Bloomberg:

A Chinese solar-cell maker failed to pay full interest on its bonds, leading to the country’s first onshore default and signaling the government will back off its practice of bailing out companies with bad debt.

Shanghai Chaori Solar Energy Science & Technology Co. (002506) is trying to sell some of its overseas plants to raise money to repay the debt, Vice President Liu Tielong said in an interview today at the company’s Shanghai headquarters. The company said March 4 it will only be able to pay 4 million yuan ($653,990) of an 89.8 million yuan coupon due today.

The number of Chinese companies whose debt is double their equity has surged since the global financial crisis, suggesting this first onshore bond default won’t be the nation’s last. Publicly traded non-financial companies with debt-to-equity ratios exceeding 200 percent have jumped 57 percent since 2007, and Chaori Solar may become China’s own “Bear Stearns moment,” prompting investors to reassess credit risks as they did after the U.S. securities firm was rescued in 2008, according to Bank of America Corp.

“There will be more defaults in China’s onshore bond market,” said Qiu Xinhong, a bond fund manager in Guangzhou at Golden Eagle Asset Management Co., which oversees 13.9 billion yuan in assets. “The next default will be likely to happen in overcapacity industries, such as steel, nonferrous metals and coal. Bond investors will shun private companies with heavy debt burdens because they’re the most at risk.”

The default has just been announced (about 1-2 hours ago) when Asian markets have already closed. So it would be interesting to see how Chinese and Asian financial markets will respond to these on Monday. So far European markets and US markets seem to ignore this.

The question now is: will this and the coming defaults create a contagion (some say the "Bear Stearns" moment) thereby triggering a global Black Swan event or will this default or the coming ones be contained and shrugged off?