Regulators will improve legal protections for bond investors and strive to reduce systemic default risks, a senior official with the China Securities Regulatory Commission said on Thursday.

"We will urge bond issuers and underwriters to shoulder their obligations and responsibilities in case of a default, and we will also study an improved compensation system for investors," said Ouyang Zehua, director of the listed company supervision department of the CSRC.

He's also a deputy to the 12th National People's Congress, the top legislature, which is currently meeting in Beijing.

He was commenting on what is expected to be the nation's first onshore corporate bond default, which involves Shanghai Chaori Solar Energy Science & Technology Co.

The company said on Monday that it won't be able to make an interest payment of about 89.8 million yuan ($14.8 million) due on Friday on 1 billion yuan in five-year bonds that were issued two years ago.

As the company's bonds have a large retail investor base, it makes the case noteworthy.

Information about the default will be released according to developments in the case, and the CSRC has reminded investors to keep up to date with the situation.

"We will keep an eye on potential regional or even systemic financial risks," said Ouyang.

In Premier Li Keqiang's annual government report released on Wednesday, he stressed the principle that any sudden systemic crisis in the financial system should be prevented.

The CSRC official said Chaori Solar was a case in which market rules were being observed.

"The whole solar energy industry has been deteriorating since market liquidity tightened in the second half of 2013, and that will affect companies' cash flows" this year, the regulator said.

Fitch Ratings said on Thursday said that "the likely first default of a Chinese corporate onshore bond will be positive for the market in the long term as it will instill greater discipline to price credit risk more effectively".

Previously, many defaults in China were averted after local governments, State banks or asset management firms provided emergency funds or debt extensions.

Fitch analyst Wang Ying said that the Chaori default may signal a shift in the government's stance toward a greater tolerance of outright corporate defaults.

"We expect a reduction of onshore lenders' and investors' risk appetites, which could pressure frailer companies' liquidity, especially in sectors challenged by cyclical downturns and persistent capacity surpluses," Wang said.

"It may also prompt further regulatory progress to provide more clarity on the legal process governing domestic bankruptcies and restructuring, which should benefit both onshore and offshore creditors in the long run," she added.

Chang Jian, chief economist in China at Barclays Capital, said that high debt repayment pressures in a slowing economy, along with increasing maturity mismatches in the official and shadow banking sectors, suggest greater liquidity risks.

"The government's challenges of deepening reform, creating a more market-oriented economy and ensuring stable growth are huge," she said.

Chang said sentiment in the high-yield bond market could be hurt by a default, but "risk-free" assets would likely be supported, given the currently easier liquidity conditions.

(China Daily 03/07/2014 page17)