A small construction materials company failed to pay interest on 180 million yuan ($29 million) of bonds, local media reported Tuesday, marking China's second default on a domestic bond in a matter of weeks.

The latest default news underlines fears of rising credit risks in China, partly fueled by signs that the economy is slowing down, especially the real estate sector, a key driver of growth.

Xuzhou Zhongsen Tonghao New Board Co Ltd missed an interest payment due on Friday on high-yield bonds issued last year, the 21st Century Business Herald newspaper reported. With a coupon rate of 10 percent, according to Thomson Reuters data, the interest payment would be worth 18 million yuan.

A default by Xuzhou Zhongsen would be the first in China's high-yield bond market, which was launched in June 2012 in a bid to expand financing channels for small, private firms.

It comes after Shanghai Chaori Solar Energy Science and Technology Co Ltd missed an interest payment on a yuan bond last month, becoming China's first-ever domestic bond default.

Chaori's default was seen as a landmark for Chinese markets, turning on its head a long-held assumption that even high-yielding debt carried an implicit state guarantee.

Following Chaori's default, Premier Li Keqiang warned that China's economy faced "severe challenges" and that further defaults would be "hard to avoid," signaling the government has become more reluctant to step in to support failing companies.

Semiconductor, software, and commodities firms are among the most at risk for default, a Reuters analysis of more than 2,600 Chinese companies showed.

The Shanghai Composite Index closed 0.7 percent higher on Tuesday.

Xuzhou Zhongsen is an affiliate of Zhongsen Tonghao Group Co, whose businesses include construction materials, real estate and logistics. The company, based in East China's Jiangsu Province, makes synthetic wood-like materials used in ceilings, floors and paneling.

Prices for steel, copper and other basic materials have fallen in recent months as the real estate market and broader economy have slowed.

Xuzhou Zhongsen's bonds were guaranteed by Sino-Capital Guaranty Trust Co Ltd, but it declined to pay out, arguing that the guarantee had been issued by one of its local branch offices without head-office approval, the newspaper said.

Sino-Capital had sufficient funds to honor the guarantee, the 21st Century Business Herald said.

The central government's tougher debt stance comes after leaders said they would allow market forces to play a greater role in the economy and to move away from the breakneck growth that was fueled at times by wasteful investment. By forcing markets to price risk more accurately, they hope to cut back on poor investment decisions.

The trick for policymakers is to prod markets in the right direction without undermining confidence in the financial system following a massive buildup of debt since the global financial crisis. China's overall debt-to-GDP reached 221 percent at the end of 2103, according to Standard Chartered estimates.

Highlighting the difficult financing conditions facing small, private firms, Xuzhou Zhongsen has also resorted to high-interest borrowing from China's shadow banking sector to raise funds.

In July 2012, China Jingu International Trust Co Ltd sold an investment product worth 1 billion yuan to wealthy investors based on a loan to the company.

Reuters - Global Times