A Chinese power equipment maker has become the first state-owned firm to default on a bond payment in modern China, state media said on Wednesday, as the government takes a more hands-off approach.
Baoding Tianwei Group Co., Ltd. said in a filing on Tuesday with the Shanghai Clearing House that it has failed to make this year's coupon payment worth 85.5 million yuan ($13.8 million) on a domestic issue due the same day.
The power transformer maker is a subsidiary of major defence equipment maker China South Industries Group Corporation, which is directly owned and run by the central government.
The event marks the first time a state-owned enterprise (SOE) has defaulted on an onshore bond, the Beijing News reported on Wednesday.
Chinese authorities in the past had stepped in to ensure that most debt-holders in failing firms are paid off to avoid sparking social unrest -- a priority of the government.
But top leaders have vowed to let the market play a bigger role as they seek to transform the country's growth model, and Premier Li Keqiang has signalled that Beijing was willing to accept some debt defaults, saying individual cases are "hardly avoidable" under economic restructuring.
"The company made huge losses in 2014," BTW Group said in the filing, adding it lost 10.1 billion yuan last year partly because of the weak performance of its new energy business.
"The asset liability ratio has spiked and our financing capabilities waned with funds drying up. We were unable to raise the money to pay the interest despite making efforts in various ways."
Fitch Ratings said in a note Wednesday the credit event indicated that SOEs "are no longer shielded" from domestic bond default, and Beijing could allow more failures to occur to "serve the government's reform agenda".
But it added: "The government is likely to maintain a cautious stance on defaults of large monetary values, those that involve large corporates in strategic sectors, and/or those that hurt a large number of retail investors in the near term."
Solar company Chaori last year became China's first-ever firm to default on a domestic corporate bond after it was unable to make full interest payments of 89.8 million yuan. Several months later it went through a restructuring.
This month, technology firm Cloud Live said it could not meet a 241 million yuan debt repayment, making it the country's first company to default on corporate bond principal.
And on Monday developer Kaisa Group Holding confirmed that it had failed to pay interest on its US currency debt. It was China's first developer to miss an offshore bond repayment.
Analysts previously said such defaults could benefit the market in the long term by raising awareness of risk and making investors more selective.