PBOC allows some debt defaults

China's central bank hinted yesterday that it was willing to accept some debt defaults in the US$1.8 trillion wealth management market, as the world's second-largest economy struggles to curb bad debts that pose a risk to the financial system.

"Under the premise of preventing systematic risks, allowing some default cases to happen naturally in compliance with market forces will... help rectify behavior of product issuers and investors and benefit the healthy development of the wealth management market," People's Bank of China deputy governor Pan Gongsheng told the third North Bund Financial and Cultural forum held by the Hongkou District government yesterday.

“It is not only a technique but also an art to balance the power of the market and the effective management and control,'' Pan said.

He also asked to enhance the disclosure on risk and information of financial products to the investors as well as improve the classification on the products and investors. The financial institutes and the investor should also make it clear on their risks.

Pan's remarks echoed those by Premier Li Keqiang earlier this month after the country's first-ever default on a domestic corporate bond sparked concerns that other firms could follow suit.

Li said authorities "pay very high attention" to financial and debt risks, but individual cases of such defaults were "hardly avoidable".

China's wealth management product market ballooned to 11 trillion yuan (US$1.8 trillion) in early 2014 from two trillion yuan in 2011, Pan said.

"Guaranteed repayment... although it will ensure short-term stability, won't help the market to effectively differentiate risks and will eventually lead to accumulated risks," he said.

In early March, Shanghai-based Chaori Solar Energy Science &Technology Co said it was unable to make bond interest payments of 89.8 million yuan, sending it into a landmark default.

Earlier this year, the domestic financial market was gripped by worries over other financial products issued by trust companies, which have drawn comparisons to the American "junk bonds" of the 1980s.