Why was Chaori’s default a landmark event for China’s bond market?
For a long time there has been a market perception of implicit Chinese government support for companies, especially issuers of onshore bonds. That perception may be changing. Indeed, Chaori’s recent default signals greater government willingness to let borrowers be subjected to market discipline. It is clear that the Chinese government is beginning to address this difficult moral hazard and the issue surrounding an implicit state guarantee of financially weak and commercially unviable borrowers. However, we are unlikely to see support for state-owned enterprises and local government financing platforms being reduced soon.
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