China's first corporate debt default in at least 17 years has sparked fear that the country's 'Lehman moment' is fast approaching, and Lombard Street Research says this is just the tip of the iceberg.
Shanghai Chaori Solar Energy Science & Technology failed to make an 89 million yuan ($14.5 million) interest payment on Friday. On Tuesday, another solar company announced a second year of net losses, leading some analysts to pinpoint the firm as the next domino to fall.
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"The system is a house of cards that will collapse without change over the next few years," Diana Choyleva, head of macroeconomic research at Lombard Street Research said in a note titled 'China's bond default: the tip of the iceberg.'
China's debt problems have been a major concern for investors in recent years. The country's corporate debt hit a record $12 trillion at the end of last year, Standard & Poor's estimated, equivalent to 120 percent of gross domestic product. And as the figure accelerates in coming years, as analysts expect, so will the level of restructuring and defaults as companies sell assets and undertake mergers in a bid to pay their debts.
"It [the Chaori default] is likely is the tip of the iceberg," said Robert Prior-Wandesforde director of Asian economics research at Credit Suisse.
"We've all known for some time that there's been a huge unsustainable credit boom in China and it's going to affect large parts of the corporate world and large parts of the government sector as well," he added.
Although many analysts have long argued that the government has the firepower to step in and bail out troubled firms, others argue that the credit chains have become so long and convoluted it might be too challenging a task.
"The saving grace is that the central government is there to stand behind companies and local governments who are deemed to matter [But] it is a tangled web and it's not easy to sort out even for the Chinese government, but they can limit the damage," he added.