How Can Failure Be A Good Thing?

Below is a synopsis of this investment report:

• Late last week, China experienced its first corporate bond default as the solar panel maker, Chaori Solar, failed to make an interest payment.  Although defaults are commonplace in the U.S., China’s local governments have historically bailed out companies that are close to missing payments on loans.
• The reason for most bailouts is almost always politically motivated.  Local officials in China often fear that a default would damage their career prospects, and the potential economic concerns surrounding unemployment from a failed enterprise in their region/district have encouraged bailouts in the past.
• As a result, investors have often viewed bonds in China to have implicit government backing, which is something that has benefitted China greatly and fueled a rapid credit boom since 2009 to a total size of $1.4 trillion.  Since many investors felt that corporate bonds were as safe as government bonds, they chased those bonds with the highest returns with no concern for default risk.

But failures are needed in markets…

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