Chaori, a solar firm, would be the first company to default in China’s massive and protected domestic bond market. The bond market of China is well protected and controlled by the government, which is why these kinds of defaults are rare in the economy.bond marketThe solar company, in a statement to the stock exchange, said that it is finding it difficult to pay the annual interest due on Friday because of pressure and other uncontrollable factors.

A much needed default

Chaori deals in solar panels and has to pay interest of around 89.8 million renminbi or around $15 million, on a 1 billion renminbi bond sold to domestic investors, in 2012. Chaori could only make the arrangements of around 4 million renminbi to pay as interest. So, the company would default except if it generates new funds or receives a bailout. China has a huge and fast growing but protected domestic bond market.

Previously, there have been instances of Chinese firms defaulting on the American dollar debt sold to the international investors in the offshore bond markets, but, according to the analysts, Chaori’s default in domestic debt market is huge, and a much needed one, when compared to the previous ones.

“We think it’s a good thing as a normal economy needs defaults to better price bonds and other debt products,” Chinese analyst Ting Lu and other analysts of Bank of America’s Merrill Lynch unit published in a research note to the investors. “Defaults of some debt products are not on a similar scale to a collapse of a major financial institution.”

Chinese bond market still in early stages

Over the past few years, China’s onshore corporate bond market has surged aggressively, outperforming overall credit growth across the economy. Corporate bonds accumulated to 8.7 trillion renminbi as of January, or around $1.4 trillion at current exchange rates, more than the 800 million renminbi totaled in 2007, as per the data from Bank of America’s Merrill Lynch.

Compared to the overseas market, Chinese bond market is still in the developing stage, but China’s corporate sector has taken debt more rapidly than households or local governments. Total debt in China accounted for 210% of the country’s gross domestic product at the end of the year, which is more than China’s level of development, according to a report presented by Louis Kuijs of the Royal Bank of Scotland. Total household debt stood at 34% of the GDP and the ratio for government’s debt was 57% of the economy while the corporate debt stood at 119%.