China to change Disclosure Requirements for Credit Reporting

In a bid to end the practice of Chinese companies shopping for the agency that offers them the best credit rating, the China Securities Regulatory Commission has scrapped the requirement for them to no longer disclose credit ratings reports for certain bonds issued on the interbank market.

Historical defaults by highly rated mainland companies demonstrated how domestic rating agencies issued excessively generous credit scores and failed to highlight credit risks in order to win business from clients, reported Citywire Asia in an article, written by Peter Guy.

Under the new regulations, a bond issuer still needs to disclose their credit ratings report if the order of principal and interest repayments is ranked after the issuer’s ordinary unsecured debts. Such a subordinate situation could cause the bond’s rating to be lower than the issuer’s entire corporate rating.

China’s bond market has grown from USD286 billion in 2000 to over USD14.9 trillion as of June 2020. It is the world’s second largest after the US, and analysts believe there is more room to grow given that its government debt to GDP ratio still trails developed markets.

Terry Zhang, Head of Global Strategy and Business Management at Pengyuan Credit Rating Hong Kong said the CSRC’s latest policy move shows its confidence in the maturity of the bond market and investors should be required to perform their own due diligence with major issues that are currently rated instead of depending on agencies.

Greater foreign and domestic demand for fixed income products drove issuers’ ambitions for better credit ratings. Shopping for high ratings among numerous agencies has resulted in biased outcomes. More than 50% of Chinese corporate borrowers were rated AAA, compared to just 2% in the US.

Meanwhile, conflicts of interest resulted in Dagong Global Credit Rating being penalised in 2018 with a one year ban for performing consultancy work for the clients it also rated in credit reports.

Zhang believes regulators are considering the overall health and transparency of capital markets. He said : “For a long period, the incumbent ratings in China conflicted various stakeholders. So the reduction or removal of some co-dependencies actually creates more space for the rating agencies to develop better analytics.”

“These regulatory actions represent an improvement over the existing system. But they are still unlikely to result in a globally comparable rating system in China in near term, which is long-called for by global investors,” Zhang continued.