China debt defaults prompt authorities to tighten oversight of credit rating agencies
- The People’s Bank of China (PBOC) is increasing supervision of its credit rating agencies in bid to restore faith in its giant onshore debt market
- A series of defaults on bonds issued by top-rated Chinese companies late last year undermined the credibility of the domestic rating industry
Beijing is tightening scrutiny of Chinese bonds with a fresh attempt at cracking down on regulatory arbitrages and ratings shopping, following a wave of defaults that damaged the credibility of domestic rating agencies and shook confidence in the world’s second largest debt market.
In a draft regulation out for public feedback until April 12, the People’s Bank of China (PBOC) and four other financial regulators proposed credit rating agencies set up a quality appraisal system with a default ratio at its centre.
“Rating agencies must gradually lower the proportion of high ratings to a reasonable level, and help form a system with clear differentiation,” the PBOC said in an online circular released on Sunday.
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The proportion of AA ratings and above in China’s bond market, which generally represents investment grade in developed countries, was 98.49 per cent for non-financial debt instruments, 85.28 per cent for company bonds and 88.65 per cent for enterprise bonds last year, the National Association of Financial Market Institutional Investors (NAFMII), a central bank affiliate, said in a report earlier this month.