S&P warns of risks in China’s bond market rating practices

S&P Global Ratings raised concerns Thursday about inflated credit ratings in China’s bond market as Beijing works to attract foreign issuers.

Christopher Lee, regional practice lead for Asia-Pacific at S&P Global Ratings, told a capital market forum in Shanghai that too many issuers receive top-tier ratings in China’s onshore market.

Lee pointed to a specific problem where foreign issuers rated ’B’ globally receive ’AAA’ ratings when selling panda bonds in China. A ’B’ rating carries a five-year cumulative default rate of 15.34%, while AAA indicates extremely low default risk.

"Risk is being introduced into the domestic market," Lee said. "This issue will come to a head one way or another."

Data shows nearly 90% of more than 6,500 credit bond issuers in China hold AA ratings or higher. In the United States, only 4.4% of issuers receive such ratings, according to Caitong Securities.

Chinese authorities have started addressing the issue. Since April, the central bank has urged credit rating agencies to reduce the concentration of AAA ratings through closed-door meetings, according to sources familiar with the guidance. The push has resulted in several rating downgrades and withdrawals.

The 37 trillion yuan ($5.5 trillion) credit bond market plays a growing role in corporate financing as China seeks to attract foreign issuers and investors.

Lee said Chinese regulators "are moving in the right direction" and noted that creating a broader spectrum for credit differentiation remains necessary as China opens its bond market to foreign participants.