LOSS-MAKING solar equipment producer Chaori Solar will not be able to meet interest payments on bonds due Friday in what would be China’s first-ever domestic corporate bond default.

    The warning by Shanghai Chaori Solar Energy Science and Technology Co. highlights the rising credit risk in China, where record levels of corporate debt are likely to accelerate a spate of restructuring and trigger more defaults.

    Chaori Solar was obliged to pay 89 million yuan (US$14.5 million) in interest yesterday on 1 billion yuan worth of bonds issued in 2012 but it said yesterday it will only be able to pay 4 million yuan.

    “As such, the company will not be able to fully pay the interest on the ‘Chaori-11 Bond’ in time March 7,” the company said in a statement.

    Bond defaults are rare in China as the government has tried to keep the country’s debt bubble from bursting and dragging the economy down with it.

    Chaori Solar narrowly avoided a previous bond default in January 2013 after a local government in Shanghai persuaded banks to defer claims for overdue loans, which enabled the company to meet its bond interest payment.

    This time, however, a last-minute solution appears less likely.

    The Shenzhen Stock Exchange, where Chaori Solar’s bond trades, requires issuers to notify investors two days in advance of scheduled payments. Chaori’s notice yesterday indicates it is already resigned to missing the deadline.

    Chaori Solar, however, said it was working to secure the funds necessary to pay out investors in full, raising the possibility the interest payment may occur after a delay.

    The bond matures in March 2017 and carries an interest rate of 8.98 percent.

    China is still waiting for its first-ever domestic bond default, although the markets were on edge last month when a high-yield investment product issued by China Credit Trust Co. warned it may not pay out on maturity.

    That product eventually paid out principal, though not interest, after an unnamed white knight stepped in, but a few days later, another high-yield product issued by Jilin Province Trust failed to pay out on schedule.

    Both trust products were based on loans to deeply indebted coal companies.

    Analysts say a default could help reduce the moral hazard caused by the widespread assumption that corporate bonds enjoy an implicit guarantee from the government and banks.

    This assumption has allowed even weak companies to borrow at low cost, leading to excessive debt and wasteful investment.

    “We think it’s a good thing as a normal economy needs those defaults to better price bonds and other debt products,” Lu Ting, China economist for Bank of America-Merrill Lynch in Hong Kong, wrote in a note to clients yesterday.

    “We believe the chance of some bond and trust loan defaults will rise significantly in 2014, especially as the more confident government sees the need for some defaults to develop a more disciplined financial market,” Lu added.

    Defaults on offshore bonds issued by Chinese firms have occurred before. LDK Solar Co. missed several interest payments on offshore U.S. dollar bonds last year.

    China’s solar industry has in recent years suffered from severe overcapacity and falling prices for photovoltaic cells, while the government has been embroiled in a trade war with the United States and the European Union. (SD-Agencies)