Chaori Solar

On 4 March 2014, Chaori Solar became the first Chinese onshore company to default on a corporate bond. While news of the default speaks more to bonds and finance in China, it is important to understand what effects, if any, Chaori’s default has on the Chinese solar industry. Shanghai based Chaori began operations in 2003 and undertakes research, development, and manufacturing of so-called solar solutions. Chaori’s products page indicates the company produces crystalline  modules, solar cells, solar wafers, and solar-powered lamps. For more information on Chaori here is a link to the company’s English and Chinese websites.

Chaori is one of a multitude of Chinese solar companies whose existence resulted in market overcapacity. Cheap finance and local government support created a glut in the Chinese solar market. Previous state bailouts of the corporate bond market made investment in such bond seem like a sure thing, fueling high levels of investment not just in the solar industry but in others as well. The Chinese government has worked to reform the corporate bond market to move away from creating artifical safety through bailouts. A default by any company was a likely outcome of these market oriented reforms. In this sense, Chaori is only special in being the first to do so, and overseas defaults by Chinese companies occurred previous to Chaori’s. Investor reaction to the news has been mild, suggesting the whole situation was not entirely unexpected. Given the overcapacity in the solar industry it was likely that a Chinese solar company had a higher potential to default. Chaori is also not a state-owned company (SOE) meaning there was less incentive for the government to step in with a bailout offer.

Given the realities of China’s solar industry, it is likely that as government restrictions are lifted and market forces take over there will be some minor, short to mid-term turbulence. Further defaults might take place and consolidation is highly likely. The overall outcome will hopefully be a more efficient and profitable Chinese solar industry that is less dependent on government backing to survive. Chaori’s default is not likely to cause a domino effect. The company has already moved to sell its overseas solar farms in order to gain necessary funds to cover the default. All things considered, Chaori’s bond default will have a greater impact on the Chinese bond market than the overall solar industry. How that impacts China’s overall energy industry is yet to be seen.