China is likely to see its first deposit payment default of publicly issued bonds as a company in the restaurant sector faces a sharp capital shortage for an imminent payment.
The Cloud Live Technology Group Co., Ltd., formerly Beijing Xiangeqing Group, which primarily provides Hunan, Guangxi and Guangdong cuisines, announced on Thursday that it has a shortfall of 241 million yuan (39.3 million U.S. dollars) to pay deposits and interests of its corporate bonds due on April 7.
The company suspended trading in its Shanghai-listed shares on Tuesday and will continue the suspension if it fails to pay the due amount on April 7, at which point it will have set a significant first for China's corporate bond market.
Analysts said the default would be a precedent-setting case for market discipline in China's corporate bond market, where investors have long assumed the government would never allow a default.
When Shanghai Chaori Solar failed to meet an interest payment on one billion yuan's worth of bonds in October, investors were generally repaid in full, thanks to a state-owned bank bailing out the company and preventing what would have been the first domestic bond interest default.
Further bailouts or so-called "rigid repayments", may whet bond investors' appetite for riskier credit, encouraging them to lend money at artificially low rates to weak companies.
A default, on the other hand, is likely to push up the yield rate of lower-rated credit bonds, adding more downward pressure to the bond market as it grapples with money outflow due to a rallying stock market and inflation expectations, according to Fan Wei, a senior analyst with Hongyuan Securities.
"A landmark default would push investors to evaluate borrowers more carefully, helping money flow to deserving companies at the right price," Fan said.
The analyst dismissed claims that the case could be China's "Bear Stearns moment", a reference to the New York-based investment bank whose collapse preluded the global financial crisis. There will be no large-scale corporate bonds defaults causing systemic financial risks, according to Fan.
"The new corporate bond rule excludes retail investors from risky assets investment, which are major concerns of previous bailouts, and the rollout of the deposit insurance system also reins in risks from spreading, said Jiang Chao, analyst with Haitong Securities.
China Securities Regulatory Commission, the country's securities watchdog, said last Friday that it would urge the Cloud Live Technology Group to "deal with the payment issue in line with market rules and related laws".
China is capable of preventing systemic or regional financial crises while allowing market-ruled liquidation in individual and isolated cases, Premier Li Keqiang said after the country's annual parliamentary sessions in March.
