Dongbei Special Steel Group's recent failure to make a debt payment marked the first default by a provincial state-owned steel company in China. This default presents a dilemma for the Chinese government, as it is committed to allowing struggling companies to close down but must also promote more speciality steel production to reduce reliance on imports. Dongbei Special Steel will most likely be bailed out, probably by another SOE. If it was not a specialty steel producer we would expect the government to let it fail. Once one SOE is allowed to fail, it will trigger more defaults and accelerate the pace of overcapacity cuts.