China may drop credit rating requirement for exchange-traded bonds

12 Aug, 2020 05:44
source: Singularity Financial

Singularity Financial Hong Kong August 12, 2020 – China’s securities regulator is proposing to remove a mandatory credit rating requirement on new corporate bond sales to reduce borrowers’ reliance on ratings and is soliciting opinions on such a revision.

The China Securities Regulatory Commission didn’t keep the clause on ratings in a new draft of guidelines on issuance and trading of exchange-listed corporate notes that it published late Friday last week when seeking public feedback.

The proposal represents a response to a rash of corporate bond defaults in the last two years by some highly rated companies and scandals involving rating providers with conflicts of interest.

Market watchers said the move is in line with market trends and international practices and will help improve rating quality, curb rating inflation and reduce conflicts of interest between rating companies and issuers.

China’s credit rating industry has long been criticized for providing favorable scores for local issuers, downplaying risks and lagging in making rating adjustments. The mandatory credit rating requirement on new bond issuance to some extent reduces the incentive for rating companies to disclose issuers’ credit risks reasonably, a person at a local rating company said.

China’s securities regulator has proposed removing a requirement for bond issuers on the nation’s stock exchange markets to seek credit ratings, in the latest move to make it easier for firms to sell debt.

“The move could make it easier for some issuers to sell bonds and it is in the spirit of implementing the registration-based system for debt issuance with a more streamlined process,” said Qi Sheng, chief fixed-income analyst at Founder Securities Co.

“This move can address excessive competition in the local credit rating industry,” said Li Han, analyst from Citic Securities Co., adding that it will prompt rating firms to focus more on borrowers’ business operations and financial data.