China's first corporate default sparks legal action: lawyer

China's first-ever default on a domestic corporate bond Friday has sparked legal action by investors owed interest payments from a solar company, their lawyer said.

Shanghai-based Chaori Solar Energy Science & Technology Co. said Tuesday it was unable to make full bond interest payments of 89.8 million yuan ($14.7 million).

Chaori's board secretary, Liu Tielong, confirmed Friday that the company was in default, Dow Jones Newswires reported.

The development is being widely described as China's first ever corporate bond default, but analysts say that it could benefit the market in the long term by raising awareness of risk and making investors more selective.

"The default today is already an established fact," said lawyer Gan Guolong, who represents investors. "We will definitely help recover bondholders' interests through relevant legal action."

Investors had already asked the Higher Court of Guangdong province to order payment from the company, its listing exchange and the lead underwriter for the bond's initial issue in 2012, he said, but the case was still pending.

Chaori lists both shares and bonds on the Shenzhen exchange in Guangdong.

A commentary issued by China's official Xinhua news agency late Thursday suggested the government could send a signal by allowing the company to default.

"The episode should help reduce the moral hazard caused by the widespread assumption that an almighty government will always bail out underwater investments with taxpayers' money," the commentary said.

"That, after all, is the market playing its own decisive role," it said, using a catchphrase for economic reforms pledged at a key Communist Party meeting last year.

China's foreign ministry spokesman Qin Gang said Friday: "No matter if it is the securities market or the bonds market, it is only natural for there to be some fluctuations."

- 'No warning' of risk -

Analysts said bond buyers, who are largely retail investors in China, would be hurt but a default would have a positive impact on the country's corporate debt market.

"Municipal governments and banks in China have stepped in to help distressed companies meet their bond payment obligations during the past few years," ratings agency Moody's said in a report on Friday.

"These bailouts have led some investors to overlook the fundamental credit risks in bonds."

Chaori investors said representatives had also asked the district government in Shanghai, where the firm is located, and the China Securities Regulatory Commission market watchdog to act.

Wang Yong, who invested 1.28 million yuan of his parents' retirement funds in the Chaori bond, told AFP he was not aware of the risks -- but placed the blame on others.

"The Shenzhen Stock Exchange didn't give us any warning of the risks. The exchange is responsible, just like if we bought fake goods at a shopping mall and the mall was responsible," he said.

Chaori shares have been suspended from trading on Shenzhen's small- and medium- enterprise board since February 19. They last traded at 2.59 yuan.

Trouble in China's solar sector, which has been plagued by falling prices for cells and panels as well as production over-capacity, came to the forefront last year with the collapse of Suntech Power, once the world's biggest solar firm.

Early this year, worries surfaced in China over other financial products issued by trust companies, which have drawn comparisons to American "junk bonds" of the 1980s.

In one case a $160 million investment product structured by Jilin Province Trust and backed by a coal firm failed to repay capital and interest five times by mid-February.

Separately, a $500 million investment product structured by China Credit Trust avoided default after an unknown party made good on principal payments to hundreds of investors, though they have not received pledged interest.