When, six months ago, we first brought the market's attention to Chaori Solar - China's first corporate bond default in history - there were 2 narrative sin play: 1) it's all good, government knows the contagion risk and will bail them out (that happened), or 2) if government bails them out, it will merely delay the inevitable and stoke further risk exposure (that happened too). However, as Bloomberg reports, the consequences are coming as bondholders met today to discuss the value of any assets left (Chaori’s liabilities were more than 700 million yuan greater than its assets). With China's TSF collapsing last month, perhaps demand is finally waining for these high-risk assets, but expectations of implied government support remain, as one Chaori 'loser' laments, "never anticipated any risks with the securities."

Halted since April...

As Bloomberg reports,

Holders of China’s first corporate bond to default onshore met today in Shanghai, as investors look for clues on how the government will balance market liberalization with steps to maintain stability.

There was difficulty assessing the overseas assets of Shanghai Chaori Solar Energy Science & Technology Co...

More than 10 police cars were on the street in front of the company headquarters today around 2:30 p.m. as the gathering took place.

While Premier Li Keqiang said defaults may be unavoidable in some cases after Chaori failed to make a full coupon payment on March 7, the country has averted similar cases since. Widespread bond nonpayments would cause financial market turbulence, which can’t be allowed when the economy faces “relatively heavy” downward pressure, according to a front-page commentary in a central bank publication today.

Chaori only paid 4 million yuan ($650,755) of an 89.8 million yuan coupon due in March on its 2017 bonds, becoming the first company to default on a yuan note onshore. Shanghai marked a milestone in corporate bankruptcy in June when a court accepted a restructuring application for the manufacturer.

As of March, Chaori’s liabilities were more than 700 million yuan greater than its assets, according to the statement.

No risk...

Ding Guixiang, who said she invested more than one million yuan in the Chaori bonds, said outside the meeting today that she had never anticipated any risks with the securities when she bought them.

Government to the rescue...except for Chaori...

“To prevent large-scale bond defaults, regulators will strengthen monitoring and supervision to solve crises in a timely manner,” according to the commentary today in the Financial News, a publication of the People’s Bank of China. The commentary was by Xu Shaofeng, who wasn’t identified.

As JPMorgan warned in a previous note,

"avoiding defaults is not the right answer, as it will only delay or even amplify the problem in the future."

A default that encourages lenders to price in risk would be a positive development.

We noted before that a more confident government means more defaults...

With amazing speed in consolidating power in 2013, a more confident President Xi Jinping and team are expected to push for a wide range of reforms. 2014 will be the year for China seriously cleans up mounting local government and corporate debts which have been rapidly accumulated since late 2008.We believe the chance of some bond and trust loan defaults will rise significantly in 2014, especially as the more confident government sees the 

Clearly then - the government is not confident.