(Reuters) - China looks set to see its first default by a state-owned firm after Baoding Tianwei Baobian Electric Co Ltd said it had not raised enough funds to make a bond interest payment due on Tuesday.

"The probability of making the payment has become highly uncertain," a notice posted by the company on the website of China's bond clearinghouse stated earlier on Tuesday

A default by the power company will also make it the third listed Chinese firm to publicly default on an interest payment to bond investors on an onshore issue, adding to evidence that Beijing is slowly withdrawing its sovereign guarantee of low-quality bonds, even if the state is part owner.

"If Tianwei ultimately ends up defaulting, there's hope it might destroy the ironclad guarantee reputation of central government-owned issuers," wrote analysts at China Chengxin International Credit Rating Co in a research note.

But they added that the low grade of Tianwei and the other defaulters limits the market impact of any defaults.

The news comes shortly after a full default on both principal and interest by Cloud Live Technologies earlier this month, and a more recent offshore default by Kaisa Group, the first Chinese developer to default on dollar bonds. Investors are now eyeing developer Glorious Property Holdings, whose bond payment comes due on Saturday.

But defaults on bonds sold to foreigners offshore have failed in the past; what the Chinese political system has struggled with is allowing domestic defaults. The first default in 2014 by a small private solar power company ultimately ended in a bailout several months later.

Baoding Tianwei Baobian Electric is a subsidiary of the Baoding Tianwei Group, which owns 23 percent of the listed entity. Baoding Tianwei Group is in turn entirely owned by the Beijing-based China South Industries Group Corporation, which advertises itself as a part owner of Changan Automobile Group on its corporate website as well as a major defense equipment maker. It is directly owned by the central government.

On April 16, the company had warned investors that it might miss an 85.5 million yuan ($13.8 million) interest payment.

The 5-year, 1.5 billion yuan bond maturing in 2016 has a coupon of 5.7 percent. It was originally rated AA+, but was later downgraded to BB.


Despite its links to the government, however, there were few signs China South Industries was going to ride to Baoding Tianwei's rescue.

"This affair has no connection with us," said an employee of China South Industries when contacted, although the employee confirmed that Baoding Tianwei is a subsidiary. He suggested contacting its underwriter, China Construction Bank.

When contacted by Reuters, China Construction Bank declined comment.

The case highlights the unclear relationship between Chinese firms and their government sponsors. Chaori Solar, China's first firm to default in March 2014, was privately owned, and yet its ultimate bailout later that year was orchestrated by its local government.

Traders saw the additional liquidity from the Chinese central bank's cut to banks' reserve requirement ratio (RRR) on Sunday as overwhelming any market reaction.

"The market is swamped with money after the RRR cut," said a senior trader at an Asian bank in Shanghai. "Yields on every type of fixed income product are falling, while bullish sentiment washes away any secondary negative news."