Caixin
Feb 27, 2021 07:35 AM
FINANCE

China Revamps Credit Rating Rules for Corporate Bonds

The China Securities Regulatory Commission issued rules to remove credit rating requirements on new corporate bond sales.
The China Securities Regulatory Commission issued rules to remove credit rating requirements on new corporate bond sales.

Chinese companies will no longer be required to obtain credit ratings before they sell bonds on the public market under new rules issued Friday. The move could reshape the country’s scandal-plagued credit ratings industry.

The China Securities Regulatory Commission revamped regulations in two separate policy documents to manage corporate bond issuance by introducing a more market-oriented approach to debt ratings. The move reflects regulators’ efforts to shore up market confidence following a series of high-profile defaults by highly rated state-owned enterprises (SOEs) that exposed how domestic credit rating agencies soft-pedaled potential risks to investors.

The new rules remove a provision requiring issuers to engage a qualified credit rating company to grade new debt instruments for public sale. Companies will also no longer be required to have AAA credit ratings as a qualification for selling bonds to institutional and retail investors. Instead, issuers will be able to rate their bonds on a voluntary basis.

Meanwhile, the new rules clarify financial and credit record criteria for bond issuers, strengthen disclosure requirements and toughen supervisory requirements on issuers’ shareholders.

Analysts said the changes will improve credit rating quality and weaken issuers’ and investors’ reliance on external ratings. The mandatory credit rating requirement on new bond issuance to some extent reduced the incentive for rating companies to disclose issuers’ credit risks reasonably, a person at a local rating company said.

The new rule will force credit rating companies to compete for market share by improving their credibility and the quality of credit reports rather than by launching price wars, industry insiders said.

Only by reducing investors’ reliance on external ratings and encouraging them to make investment decisions themselves can ratings inflation be fundamentally cured, driving the credit rating industry to critically reflect investor risks, market participants said.

Credit rating providers, which are supposed to fairly evaluate corporate financial health, have long been criticized in China for providing generous scores for issuers and downplaying credit risks to secure clients.

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In Depth: Why China Ratings Agencies Didn’t See the Corporate Default Wave Coming

Several highly rated companies rattled China’s bond market last year with abrupt defaults, sparking concerns over the quality of credit ratings. They include Brilliance Auto Group Holdings Co. Ltd., the parent of BMW AG’s major Chinese joint-venture partner, and Yongcheng Coal and Electricity Holding Group Co. Ltd., a major state-owned coal mining company in Central China’s Henan province.

In January, China Chengxin International Credit Rating Co. Ltd., one of the country’s top credit rating companies, was banned from scoring new interbank bonds for three months over misconduct in ratings services it provided for Yongcheng Coal.

China’s interbank bond market regulator recently pushed to change bond rating practices. Earlier this month, the National Association of Financial Market Institutional Investors said it removed mandatory registration requirements of credit ratings for three types of interbank bonds — medium-term notes, as well as short- and super short-term commercial paper. The measure was part of a plan to eliminate the credit rating requirements for both bond registration and issuance, the regulator said at that time.

The CSRC first proposed removing the mandatory credit rating requirement on new corporate bond sales in August.

Luo Meihan contributed to this story.

Contact reporter Han Wei (weihan@caixin.com) and editor Bob Simison (bobsimison@caixin.com).

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