China cracks down on top ratings for corporate bonds

{"text":[[{"start":5.85,"text":"Chinese regulators are pressuring rating agencies to cut back on triple-A designations for higher-interest borrowers amid mounting concerns about ratings inflation in the country’s corporate bond market."}],[{"start":16.549999999999997,"text":"The People’s Bank of China told domestic agencies in April to review high credit ratings, especially for bonds with much higher yields than government debt, according to three people familiar with the instruction."}],[{"start":29.499999999999996,"text":"Since then, top domestic agency Lianhe Credit Rating has withdrawn ratings from several triple-A issuers and its rival Chengxin briefly published a rating suspension notice before removing it."}],[{"start":42.449999999999996,"text":"“Over the past three months, these rating agencies are taking concrete steps to limit the portion of triple-A ratings,” said Kaihua Deng, associate professor of economics and finance at Renmin University."}],[{"start":56.199999999999996,"text":"High proportions of triple-A ratings have long been a concern in China’s corporate bond market, which evolved rapidly after the country’s financial system reopened to the world in the 1990s."}],[{"start":67.35,"text":"An FT analysis in August last year found more than 90 per cent of newly issued rated bonds were triple A, compared with less than half in 2016."}],[{"start":77.35,"text":"“Two years ago, the authorities already knew that the portion of triple A ratings was just too high,” said Deng."}],[{"start":null,"text":"

"}],[{"start":84.25,"text":"Ratings — which are paid for by issuers — had already been under scrutiny after the 2021 collapse of property developer Evergrande and a wave of domestic defaults."}],[{"start":95.05,"text":"Authorities have this year sought to address off-balance-sheet debt held by local governments, curbing new sales of their debt in an effort to shift the economy away from property-driven growth."}],[{"start":106.45,"text":"As part of the top-down push, regulators have carried out on-site inspections of rating agencies since May, the three people said."}],[{"start":113.95,"text":"They have focused on bonds in which the coupon rate is more than 2 percentage points above the yield to maturity of comparable government debt at the time of issue."}],[{"start":123.4,"text":"In June, the PBoC flagged bonds with a 1 to 2 percentage point spread and bonds with a spread above 2 percentage points, and asked rating agencies to review them."}],[{"start":135.05,"text":"The inspections also covered compliance issues, such as whether agencies won clients by assigning more favourable ratings than their rivals."}],[{"start":143.10000000000002,"text":"Market participants expressed concern about the lack of clarity over regulators’ thresholds for problematic ratings."}],[{"start":150.3,"text":"They said the action could distort financing decisions and push borrowers to issue more short-term bonds, which have spreads that are likely to comply with regulators but would expose them to rollover risk."}],[{"start":162.75,"text":"“Yield spreads are not determined solely by an issuer’s credit quality,” said a credit officer who asked not to be named. “They reflect a range of factors including duration, asset class, sector and liquidity and even risk events around that time."}],[{"start":176.5,"text":"“But the regulator is now taking a very blunt, one-size-fits-all approach.”"}],[{"start":181.15,"text":"Lianhe withdrew its ratings for Xi’an Qujiang Cultural Financial Holdings and Tianjin Jinrong Investment Service Group last month. Both companies’ bonds were rated triple A and had coupon rates well above the benchmark government yield."}],[{"start":195.9,"text":"Chengxin published a notice on its website saying it would suspend issuance of ratings on some bonds for three months or more but then removed it after it faced accusations of halfheartedly complying with regulators. It told local media its plan was unrelated to regulatory scrutiny of high ratings."}],[{"start":214.3,"text":"Among bonds issued since the start of 2025, just over 1 per cent had spreads above 2 percentage points, while about 9 per cent had spreads of 1 to 2 percentage points, according to data compiled by brokerage Industrial Securities."}],[{"start":228.75,"text":"“I think the market on average can identify the less qualified firms and obviously they impose a penalty,” said Deng."}],[{"start":236.6,"text":"But the professor noted some investors, “for example insurance companies and smaller institutional investors”, might still be misled by high ratings."}],[{"start":246.54999999999998,"text":"“Even if on average the market is not stupid, the authorities still want to contain this rating inflation issue,” he said."}],[{"start":252.74999999999997,"text":"Lianhe and Chengxin did not respond to requests for comment. The PBoC declined to comment."}],[{"start":259.9,"text":"Yao Yu, founder of RatingDog, which publishes China’s private-sector purchasing managers’ index, said the share of triple-A bonds would still be “very high” even after regulator-flagged ratings were lowered or withdrawn."}],[{"start":272.5,"text":"“You can’t bring down the number of triple A ratings overnight with an administrative order,” he said."}],[{"start":279.1,"text":"Reporting by Thomas Hale in Shanghai, Cheng Leng in Beijing and William Sandlund in Hong Kong"}],[{"start":291.25,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1783836507_7450.mp3"}