For the first time in China’s history, a Chinese company defaulted on its bond payments, signaling a change in the country’s economic policy.  Shanghai Chaori Solar Energy Science and Technology, a company that produces solar panels, could not make its interest payments on a one billion yuan bond, and defaulted after the Chinese government refused to bail the firm out. This is a stark change from previous actions by China, which has always bailed out onshore companies that were on the verge of defaulting. This decision to allow Chaori to default shows China’s commitment to a more open economy, in which investors cannot fall back on the government to bailout bad business decisions.

While the default of Chaori is historic, many would argue that it does not mean much in the grand scheme of things, as defaulting and bankruptcy happen quite frequently around the world. The question some have is whether or not this default could be the domino that leads to more defaults among Chinese companies, as investors lose the trust they once had in Chinese firms. Most analysts don’t see this scenario playing out, since they believe that the Chinese government would begin to bail out companies before the domino effect got out of control.  However, they do see Chaori’s default as an important sign for China’s future.

The government allowed Chaori to default on its payment to send a signal to investors and businesses that they cannot always count on the government. China’s government had to do this at some point, as they could not keep spending the large amounts of money needed to help every company, especially with the huge growth of the country’s economy. China’s system of keeping companies afloat with bailouts has led to bloated markets, such as the solar panel industry, where there are more companies than the free market can support.  Li Keqiang, premier of China, knows this, which is the reason that he left Chaori to fend for itself. Keqiang hopes that by moving the markets toward more free market practices, he can thin out the industry sectors, while at the same time maintaining investor’s trust in Chinese companies.

Keqiang’s move to freer economic practices could have implications on the global markets, especially if the policies further slow the growth of China’s economy. While most people see the premier’s decision to reduce government bailouts as a positive, it could lead to investors losing trust, at least temporarily, which could cause China’s economy to slow down faster than expected. This in turn would hurt the markets in Europe and the United States, possibly slowing the global economy.

While there may be some negative side effects, as previously mentioned, Chaori’s default was necessary for China, as the country continues to grow and move toward new free market policies. The default demonstrates that China is ready to embrace both the positive and negative sides of a free market economy, and that the government is not afraid to leave certain things up to the markets.

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