Fresh Corporate Default Tests China’s Resolve

Defaults, like profits, are a part of doing business, warns China’s premier, after Haixin Steel and Chaori Solar failed to make payments on debt. “Li Keqiang told reporters that China was likely to see a series of defaults as the government accelerates financial deregulation but said his government would take steps to ensure they do not pose a threat to the wider financial system,” reports the Financial Times. Allowing defaults to proceed reduces the challenges of moral hazard, when companies take higher risks with the assumption that governments or lenders will intervene with a bailout. Analysts are divided: A strong government position against bailouts could reduce risky investments or it could ignite investor panic. Haixin was a lead investor in a firm that guaranteed other loans for a fee, reports Financial Time, adding “Chinese steel mills are struggling with severe overcapacity, heavy debt loads and a softening market and over half of them are losing money by some estimates.” – YaleGlobal