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The People’s Bank of China (PBOC) is boosting supervision of its credit rating agencies. Photo: Bloomberg

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.

The new rules follow a string of defaults on bonds issued by top-rated Chinese companies, many of whom were backed by the government. The non-payments have rocked investor confidence and stirred questions about the reliability of local rating agencies in assessing risks.

“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.

In the American market, less than 10 per cent of bonds are rated AA and above.

Rating agencies have been asked to conduct unsolicited credit ratings, focus on the credit conditions of issuers and anticipate risk, rather than make assessments primarily on existing financial statements. Issuers are encouraged to pick two or more rating services for cross validation.

Meanwhile, financial regulators would apply greater scrutiny to evaluations of the agencies, including large-scale upgrades or downgrades, or an upgrade after switching to a new rating service.

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“For a one-off adjustment of three or more notches, rating agencies must start a full-scale international check,” the PBOC said.

NAFMII found that the ratings of 31 issuers, or 5 per cent of the total, were different in the interbank market and the exchange-traded market last year. This figure is lower than 7.4 per cent recorded at the end-September.

The association said that 50 of the 537 issuers who changed their rating agencies last year subsequently received a higher rating. It also noted that some of last year’s 127 credit downgrades were too dramatic, including 58 downgrades of more than three notches and 12 downgrades by over 10 notches.

Dagong Global, for example, which was punished in 2018 after it was found to have effectively sold good ratings to bond issuers, lowered private-run Macrolink Group to C from AA+ in March 2020.


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China has 11 major domestic agencies and has opened the door to international giants S&P Global Ratings and Fitch Ratings.

The PBOC has long sought to improve the effectiveness of the sector, especially as international investors have begun flocking to the bond market. Most of the 2 trillion yuan (US$305.6 billion) in overseas holdings are of Chinese government or quasi-government bonds.

The central bank has already enhanced supervision of the industry after the defaults of top-rated state-owned enterprises such as Huachen Automotive Group, which is the Chinese partner of BMW, Tsinghua Unigroup and coal miner Yongcheng Coal & Electricity Holding Group led to market turmoil late last year.


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Golden Credit Rating, which registered 263 million yuan of revenue in 2019, was suspended in mid-December from issuing new securities ratings for three months after the Central Commission for Discipline Inspection charged its executives with taking bribes from firms in exchange for high ratings.

The International Monetary Fund has said in the past that the entry of international ratings giants could strengthen the culture and quality within the Chinese credit rating industry.

However, the foreign presence is still fairly small in China. The NAIFF report showed that China Chengxin International, in which Moody’s holds a 30 per cent stake, rated more than 30 per cent of bond issuances last year. It was followed by Shanghai Brilliance, Lianhe Credit Rating and Golden Credit Rating, which had a share of between 10-20 per cent.