A SMALL manufacturer of polyester yarn based in China’s wealthy Zhejiang Province has declared bankruptcy, threatening its ability to meet an interest payment on a high-yield bond due in July.

    Zhejiang Huatesi Polymer Technical Co. asked a local court for bankruptcy protection in early March, according to an announcement on the website of the Anji County People’s Court.

    The firm sold 60 million yuan (US$9.7 million) in bonds in a private placement in January 2013 at an interest rate of 11 percent. The next interest payment is due July 23, while the bond matures in January next year.

    A string of credit defaults in recent weeks has highlighted rising credit risks in China, partly fuelled by signs that the economy is slowing down.

    China’s domestic bond market experienced its first-ever default early last month, when Shanghai Chaori Solar Energy Science and Technology Co. missed an interest payment. That bond carried no guarantee, and it remains unclear if investors will be repaid.

    A technical default late last month by a small construction materials firm, Xuzhou Zhongsen Tonghao New Board Co., was the first in China’s high-yield bond market.. The guarantor of that bond eventually agreed to fund the required interest payment.

    Chaori’s default was seen as a landmark for Chinese markets, turning on its head a long-held assumption that even high-yielding debt carried an implicit State guarantee.

    Reflecting the government’s new attitude toward default, the China Securities Regulatory Commission (CSRC) described the Xuzhou Zhongsen default as a commonplace event.

    “[The Xuzhou Zhongsen bond] was issued to investors according to regulations, and the default is an isolated risk event. The commission will abide by market-based principles and handle the case according to law,” CSRC spokesman Deng Ge said at the agency’s weekly press conference Friday.

    Analysts widely expect more defaults on loans, bonds and shadow bank products this year. Semiconductor, software, and commodities firms are among the most at risk for default, an analysis of more than 2,600 companies showed.

    The Xuzhou Zhongsen default marked the first ever in China’s high-yield bond market. (SD-Agencies)