China pushes rating firms to review AAA glut in bond market

CHINA urged domestic rating firms to curb the concentration of top-tier AAA ratings in the country’s bond market, taking its most concrete step yet to better assess credit risks after years of record defaults.

The People’s Bank of China (PBOC) is leading the effort and has asked rating companies to review issuers under their coverage and assess whether some no longer meet updated standards for a AAA rating, according to sources familiar with the matter, who asked not to be identified because the discussions are private.

Among the new metrics is the spread between a bond’s yield at issuance and the yield on comparable government bonds, according to the sources.

Issuers whose spreads exceed 200 basis points could risk losing their AAA status, though rating firms will also weigh other factors when deciding whether a downgrade is warranted, the sources said.

Regulators have long sought to address concerns that China’s ratings are overly generous, making it difficult for investors to distinguish between stronger and weaker credit profiles.

Of the more than 6,000 bond issuers in China at the end of the first quarter, 27 per cent were rated AAA and 32 per cent were rated AA+, according to a report by the Securities Association of China.

By contrast, top-tier ratings are much less common in most developed bond markets. Among US issuers, for example, fewer than 1 per cent of outstanding corporate bonds carry a AAA rating from any of the three major international rating firms, according to data compiled by Bloomberg.

A representative for the PBOC did not immediately respond to a request for comment.

It’s unclear how many companies would be affected by the new standards. Any significant reduction in the number of AAA-rated issuers could raise borrowing costs, especially for the firms that have benefited from the financing advantages associated with China’s highest domestic credit ratings.

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Concerns about rating inflation have grown as a wave of defaults in recent years exposed shortcomings in the country’s credit assessment system and highlighted the need for more rigorous ratings.

One recent example is China Vanke. The distressed property developer still held a AAA domestic rating late last year when it sought bondholders’ approval to delay repayment of onshore notes. It subsequently ended its cooperation with onshore rating firms in early December.

Earlier this year, China’s major rating firms met at the urging of regulators to discuss issues including rating inflation, weaknesses in risk-warning systems and ways to boost corporate governance, Bloomberg reported in April. BLOOMBERG