BEIJING: Chinese Premier Li Keqiang signaled on Thursday that Beijing was willing to accept some debt defaults in the world’s second-largest economy as it struggles to clean up its multi-trillion-dollar “shadow banking” sector.
His comments come after the country’s first-ever default on a domestic corporate bond last week and as investors grow worried that other firms could follow suit.
Li said authorities “pay very high attention” to financial and debt risks, as he held his once-a-year news conference after the close of the annual session of the National People’s Congress (NPC), the Communist Party-controlled legislature.
He could not possibly “want to see” defaults on financial products, he said at the Great Hall of the People.
“But I’m afraid sometimes certain individual cases of such defaults are hardly avoidable,” he added.
Shanghai-based Chaori Solar Energy Science & Technology Co. said on Friday it was unable to make bond interest payments of 89.8 million yuan ($14.7 million), sending it into a landmark default.
And on Tuesday, power equipment maker Baoding Tianwei Baobian Electric Co. said its bonds would be suspended from trading after it posted two consecutive years of losses.
However, analysts said the Chaori default could benefit the market in the long term by raising awareness of risk and making investors more selective.
“Allowing Chaori to default on its bond was in fact an obvious sign that the government has started to make some adjustments (in policy),” said Zhou Hao, Shanghai-based economist for ANZ Bank.
“Previously, it wanted to avoid defaults, but now it hopes to rely more on market-oriented measures to ease some risk,” he told Agence France-Presse.
Ratings agency Moody’s said: “We believe the default will spur needed development in the onshore bond market.”
“The lack of intervention is consistent with the central Chinese government’s adoption of more market-oriented policies, which include increased tolerance for corporate bond defaults, as it reforms the country’s financial markets,” it said.
Early this year, worries surfaced in China over other financial products issued by trust companies, which have drawn comparisons to American “junk bonds” of the 1980s.
In one case, a $160-million investment product structured by Jilin Province Trust and backed by a coal firm failed to make capital and interest payments.
Separately, a $500-million investment product structured by China Credit Trust avoided default in January after an unknown party made good on principal payments to hundreds of investors, though they did not received pledged interest.
Such products are part of a murky “shadow banking” system—a vast network of lending outside formal channels and beyond the reach of regulators. They include activities by online finance platforms, credit guarantee companies and microcredit firms.
The “shadow banking” sector was as large as $4.8 trillion in 2012, more than half the country’s gross domestic product, according to a previous estimate by Moody’s.