Chaori default is a welcome move

Government turns to market forces in battle to bring about corporate change for the better

Chinese companies have borrowed enormous amounts in recent years, with the total outstanding corporate debt reaching an estimated $1.3 trillion (946 billion euros) this year, about 1.5 times China's GDP. Most of this borrowing is from banks, but the growing proportion of corporate borrowing through bond issues has driven China's bond market, now around $4.8 trillion, to become the world's fourth-largest after the United States, Japan and the European Union. Corporate bonds have been the fastest growing part of China's bond market boom, with total amounts borrowed by Chinese companies in that market increasing 10 fold in seven years.

This surge in Chinese corporate borrowing has been made possible by two things: the underlying profitability of much of China's business sector, which has created stronger creditworthiness, and the strong credit growth unleashed by China's monetary authority, the People's Bank of China, in 2009 to offset the negative impact of the US credit crisis.