A STATE-OWNED power equipment manufacturer in China failed to make an interest payment on a bond Tuesday marking the first time a State-owned firm has been allowed to default and adding to evidence that the government is slowly withdrawing its sovereign guarantee of low-quality bonds.

    Baoding Tianwei Baobian Electric Co. said in a statement on the China bond clearinghouse website that it was unable to make the payment on time.

    It was the third listed Chinese firm to publicly default on an interest payment to bond investors on an onshore issue, but the first owned by the State.

    The default “might destroy the ironclad guarantee reputation of Central Government-owned issuers,” wrote analysts at China Chengxin International Credit Rating Co. in a research note before the default.

    But they added that the low grade of Baoding Tianwei and the other defaulters limits the market impact of any defaults.

    The news comes shortly after a full default on both principal and interest by Shenzhen-listed China Cloud Live Technologies earlier this month, and a more recent offshore default by Shenzhen-based real estate developer Kaisa Group, the first Chinese mainland developer to default on U.S. dollar bonds. Investors are now eyeing developer Glorious Property Holdings, whose bond payment comes due Saturday.

    But defaults on bonds sold to foreigners offshore have failed in the past. What the Chinese system has struggled with is allowing domestic defaults. The first default in 2014 by a small private solar power company ultimately ended in a bailout several months later.

    Baoding Tianwei Baobian Electric is a subsidiary of the Baoding Tianwei Group, which owns 23 percent of the Shanghai-listed entity. Baoding Tianwei Group is in turn entirely owned by the Beijing-based China South Industries Group Corp., which advertises itself as a part owner of Chang- an Automobile Group on its corporate website as well as a major defense equipment maker. It is directly owned by the Central Government.

    Investors appeared to have taken the lack of a rescue in stride, with bond markets shrugging off the news.

    On April 16, Baoding Tianwei warned investors that it might miss an 85.5 million yuan (US$13.8 million) interest payment.

    The five-year, 1.5 billion yuan bond maturing in 2016 has a coupon of 5.7 percent. It was originally rated AA+, but was later downgraded to BB.

    Despite its links to the government, there were few signs China South Industries would rush to Baoding Tianwei’s rescue.

    “This affair has no connection with us,” said an employee of China South Industries, although the employee confirmed that Baoding Tianwei is a subsidiary. He suggested contacting its underwriter, China Construction Bank. When contacted, China Construction Bank declined comment.

    The case highlights the unclear relationship between Chinese firms and their government sponsors. Chaori Solar, China’s first firm to default in March 2014, was privately owned, and yet its ultimate bailout later that year was orchestrated by its local government.

    Traders saw the additional liquidity from the Chinese central bank’s cut to banks’ reserve requirement ratio (RRR) Sunday as overwhelming any market reaction.

    “The market is swamped with money after the RRR cut,” said a senior trader at an Asian bank in Shanghai. “Yields on every type of fixed income product are falling, while bullish sentiment washes away any secondary negative news.” (SD-Agencies)