BEIJING -  Credit rating agencies are now a major participant in China’s US$7 trillion bond market.

 

Judging by the quality and number of reports local rating agencies churn out yearly, few would disagree that credit rating agencies play a vital role in the development of the capital markets. In 2015, a total of 2,617 bonds were rated by Chinese rating agencies.

 

“Bond transaction prices in the secondary market indicate that credit rating agencies are generally accepted by investors,” says Li Zhenyu, vice-president and chief research officer at China Lianhe Credit Rating.

 

Li delivered a keynote speech before delegates at The Asset 10th Asian Bond Market Summit 2016 held today at The Westin Beijing Financial Street Hotel.

 

Lianhe is one of the top domestic rating agencies in China. Fitch Ratings is a key shareholder in the company. Last year, Lianhe released 96 research reports and published a book entitled “Credit Rating Theory and Practice”, which focuses on ratings methodology in the China market.

 

China’s rating industry, however, is also fraught with challenges.  

 

Li says that a major issue among local rating agencies is their tendency to issue favourable rating actions for borrowers. Rating firms are also quick to issue upgrades while slow with downgrade actions. This results in credit ratings that aren’t reflective of market developments, generating scepticism among investors.

 

 “The mechanism for testing probability of default needs to be further developed. Ratings based on competition for business by rating agencies is a problem,” Li adds.

 

He notes that bond investors need to abandon the “default bailout” mentality, a common perception where investors assume that the government will automatically bail out defaulting bond issuers.

 

“A well-established bond mechanism should be developed. Investors should be guided and be aware of the limitations of external ratings, which should be used as a valuable reference tool,” Li says.

 

Bond issuers should also be encouraged to seek more than one rating for their bond issues, a common practice among bond issuers in the international market.

 

“Double rating should be actively promoted and investors should be encouraged to use double ratings,” Li says.