Central Bank Says China’s AA- Bonds Are BBB- Internationally.

The People’s Bank of China has called for the opening up of the corporate credit ratings market in order provide a sounder basis for assessing the risk of Chinese enterprises.

The no. 5 working essay for 2017 released on 25 May, the People’s Bank of China claims to be the first in-depth academic comparison of Chinese and international credit ratings systems.

The essay entitled ”Disparities Between Chinese and Overseas Corporate Credit Ratings and Their Deciding Factors” (中外企业信用评级的差异及其决定因) notes that China’s domestic creed assessment market is well known for possessing unique characteristics, with the domestic rating for a given enterprise often higher than international ratings by six or seven grades.

Most domestic ratings remain heavily concentrated in the AA to AAA grade, leading to strong doubts about the compatibility of Chinese and overseas systems.

Data indicates that the average corporate credit rating given domestically is AA/Aa2, which is 7.07 grades higher than international ratings, while AA grades comprise 81% of all domestic ratings.

For this reason while the demarcation line between a speculative and investment grade bond is BBB- internationally, within China this threshold is AA-.

The PBOC essay notes that domestic ratings agencies tend to confer better grades to enterprises with larger asset scales or high leverage levels, while overseas agencies favour those with strong earnings capabilities or are state-affiliated.

It also notes that a reason for the disparity could be that domestic ratings agencies primarily make reference to other Chinese enterprises, while overseas ratings agencies look at international corporate standards.

For this reason the essay say that credit ratings in China and overseas have a difference significance due to “rating base effects,” and proposes a method for adjusting international ratings so make it possible for more effective comparisons to be drawn.

PBOC advocates further opening of China’s corporate ratings market in tandem with the increasing liberalisation of the country’s financial markets, as well as clarification and contrast of the disparities between domestic and international ratings systems in order to abet regulatory decisions in relation to bond quality.

According to the essay of overseas ratings agencies can be more vocal about Chinese enterprises, this provide a more varied basis for assessing corporate credit risk within China.

It would also make it more difficult for companies under assessment to sway the decisions of ratings agencies, and provide more indecent and impartial results.

China’s policymakers appear to be on board with PBOC’s recommendation with the State Council including credit ratings services in the list of sectors that should be further liberalised in its “Notice on Several Measures in Relation to Expanding Overseas Opening and Proactively Using Foreign Capital” (《关于扩大对外开放积极利用外资若干措施的通知》(国发〔2017〕5号)) issued at the start of the year.

China’s Ministry ofCommerce reportedly also plans to open the credit ratings market to foreign invested entities before 16 July this year.

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