China rating agencies see Chaori default as only a hiccup

Wed Apr 2, 2014 5:08pm EDT
 
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By Adam Rose

BEIJING (Reuters) - China's rating agencies are likely to keep a long-held assumption of government bailouts built into most ratings despite the country's first domestic bond defaults and warnings from Beijing that there is no blanket guarantee of support.

Last month, Shanghai Chaori Solar Energy Science and Technology (Chaori) 002506.SZ, defaulted when it missed an interest payment on a bond, and this week a newspaper reported a small construction materials company had also defaulted on an interest payment.

The central bank and government have both indicated in recent weeks that they are prepared to tolerate some failures as they reform financial markets.

Chen Dongming, chief credit officer at China Lianhe Credit Rating, which has global rating agency Fitch as a shareholder, said Chaori was not a harbinger of larger defaults that posed a systemic risk.

Roughly 90 percent of publicly issued bonds are issued by large or mid-size state-owned enterprises which are still likely to get government assistance, Chen said.

"Their likelihood of getting bank capital or government support is still a lot higher than for a private enterprise," he said.

NO INCENTIVE

Until now, it had been widely assumed that even high-yielding debt carried an implicit state guarantee so there was little incentive for investors to demand ratings that reflected creditworthiness.   Continued...

 
An employee works along a solar panel production line at a factory of Shanghai Chaori Solar Energy Science and Technology Co Ltd, in Jiujiang, Jiangxi province July 6, 2012. REUTERS/Stringer