China released new draft rules aiming to tighten oversight of credit rating agencies

29 Mar, 2021 20:05
source: Singularity Financial

Singularity Financial Hong Kong March 29, 2021 – China has released new draft rules with the goal of making credit ratings firms do a better job at rating credit, as the scandal-plagued sector faces a wide-ranging overhaul.

On Sunday, in a draft regulation out for public feedback until April 12, the People’s Bank of China (PBOC) and four other financial regulators proposed credit rating agencies set up a quality appraisal system with a default ratio at its centre.

“The new regulations come as many are asking whether domestic agency ratings have been fulfilling their risk-warning function”, a report stated by local media Caixin, “after a wave of bond defaults by highly rated state-owned enterprises (SOEs) rattled China’s bond market last year and led to accusations that ratings firms were handing out excessively optimistic ratings to secure clients.”

“Rating agencies must gradually lower the proportion of high ratings to a reasonable level, and help form a system with clear differentiation,” the PBOC said in an online circular released on Sunday.

The proportion of AA ratings and above in China’s bond market, which generally represents investment grade in developed countries, was 98.49 per cent for non-financial debt instruments, 85.28 per cent for company bonds and 88.65 per cent for enterprise bonds last year, the National Association of Financial Market Institutional Investors (NAFMII), a central bank affiliate, said in a report earlier this month and disclosed in a recent report by SCMP.

“Rating agencies have been asked to conduct unsolicited credit ratings, focus on the credit conditions of issuers and anticipate risk, rather than make assessments primarily on existing financial statements. Issuers are encouraged to pick two or more rating services for cross validation”, said in the report.

Meanwhile, financial regulators would apply greater scrutiny to evaluations of the agencies, including large-scale upgrades or downgrades, or an upgrade after switching to a new rating service.

“For a one-off adjustment of three or more notches, rating agencies must start a full-scale international check,” the PBOC said.

NAFMII found that the ratings of 31 issuers, or 5 per cent of the total, were different in the interbank market and the exchange-traded market last year. This figure is lower than 7.4 per cent recorded at the end-September.

The association said that 50 of the 537 issuers who changed their rating agencies last year subsequently received a higher rating. It also noted that some of last year’s 127 credit downgrades were too dramatic, including 58 downgrades of more than three notches and 12 downgrades by over 10 notches.

China has 11 major domestic agencies and has opened the door to international giants S&P Global Ratings and Fitch Ratings.