A Market-Based Solution to Bond Defaults.docVIP

A Market-Based Solution to Bond Defaults 　　The Dongbei Special Steel Group Co. Ltd.， which has repeatedly defaulted on several bonds in 2016， reneged on yet another bond obligation in July. All parties involved are speculating as to whether or not the steelmaker is capable of reaching an agreement with its bondholders. 　　As painful as it may be， a market-based approach should be adopted to solve the default crisis. More specifically， presumptions that the government will help pay off its debt should be abandoned. A healthy market environment is crucial to preventing debt risks of state-owned enterprises （SOEs） from destabilizing the entire financial system. 　　Since its first default on March 28， Dongbei Special Steel has missed payments on seven corporate bonds valued at 4.77 billion yuan （$717 million）. The company and its majority shareholders have yet to work out a debt repayment plan that satisfies its creditors. The company， a majority of which is owned by the Liaoning Provincial Government， is one of the three largest specialized steelmakers in the country. 　　The steelmaker is not an isolated case in China’s ailing bond market. According to financial information provider Wind Info， a total of 16 Chinese companies have defaulted on corporate bonds worth a total of 40 billion yuan （$6 billion）. In 2016 alone， 10 companies missed payments on bonds worth 16.9 billion yuan （$2.54 billion）. A sustained increase in the number of credit defaults this year has sounded the alarm on the growing danger present in the bond market， alerting investors to the lurking risks. 　　In China， conventional wisdom holds that while the government may allow insignificant private firms to default， they will not allow SOEs to miss debt obligations given the impact they have on the economy. Against this backdrop， investors assume that SOEissued bonds are implicitly backed by the state and that the government will help pay back the debt in case of a default. 　　As such expectations