Rating agencies in China under pressure amid bond defaults

Domestic agencies tend to rate domestic firms more favourably than their foreign peers, but the difference is particularly striking in China.
Rating agencies in China under pressure amid bond defaults

China’s newly issued regulations for credit rating agencies are a welcome step to bringing better oversight to the scandal-ridden industry, experts said, but a ratings gap between those by local agencies and foreign players continues to raise eyebrows.

On August 6, five central government bodies including the China Banking and Insurance Regulatory Commission and China Securities Regulatory Commission jointly issued rules that detailed requirements for rating companies’ business operations, corporate governance and disclosures, as well as punishments for industry malpractice.

For instance, the rules require rating agencies to reduce the proportion of highly-rated bond issuers, be more stringent about scoring creditworthiness based on the probability of defaults and take wider considerations for default-like situations.

The rules also required rating bureaus to avoid conflicts of interest, for instance through insulating credit rating departments from other operations.

Beijing has been tightening rules for the industry since 2017, but high-profile bond defaults by the likes of property developer China Evergrande and bad-debt manager China Huarong Asset Management have continued into this year, raising concerns about the country’s credit system, while also placing the credibility of rating agencies under a microscope.

Paras Gupta, UBP

“Asian credit spreads widened following rising default rates in China,” noted Paras Gupta, head of discretionary portfolio management for Asia at Swiss private bank UBP.

The firm moved a portion of its balanced multi-asset managed strategies from Asian investment-grade into US senior loans after the recent defaults, he added.

“Even though we believe that systemic risk at this stage is limited and contagion to broader sectors and regions should be avoided, we decided to exit our Asian investment-grade holdings in favour of US senior loans with attractive yield and lower duration risk,” he said.

ALSO READ: Market Views: Are Chinese bond defaults repelling investors?


The ratings industry has been increasingly opening up in recent years. While Chinese ratings firm, such as China Chengxin, are going abroad for offshore business expansion, foreign names have been receiving the green light from authorities to provide onshore China rating services.

Danny Chen,
Fitch (China) Bohua

Fitch Ratings in May last year became the second foreign company in China allowed to operate a wholly-owned non-Chinese credit rating agency, Fitch (China ) Bohua, after securing a license to rate fixed-income securities in the country's interbank market, amid a wider government easing of foreign access to its financial markets.

S&P Global was the first credit rating company to receive regulatory approval to establish a wholly-owned unit in China in January 2019.

Danny Chen, CEO of Fitch (China) Bohua, told AsianInvestor that “the firm welcomes the latest move by Chinese regulators to strengthen supervision of China’s credit rating agencies and increase transparency which is a positive step for the development and internationalisation of the industry”.

 “We will update the firm’s policies as necessary and comply with all regulatory requirements and we expect the new requirements to raise standards of rating agencies and promote healthy growth of the China bond market,” Chen said, noting that the new rules could bring a revolution from “rating level” to “rating quality”.

Fitch (China) Bohua currently has 30 staff in Beijing and plans to recruit more people over the next 12 months, he added, without providing exact number.

As of the end of 2020, S&P Global (China) Ratings had 50 people in employment. Besides expanding the team, the firm is also establishing a unique rating scale dedicated to the Chinese market, a spokeswoman from the rating firm told AsianInvestor, without elaborating further. 


In bond markets around the world, domestic agencies tend to give local firms higher ratings compared with global agencies.

For instance, Japanese and Korean corporate bond markets were found to have discrepancies in ratings scales between domestic and global agencies, according to a 2017 Bank for International Settlements Working Papers.

However, the differences in ratings are particularly striking in China. Both the median and average for domestic ratings are higher than global ratings by seven notches (AA/Aa2 vs. BBB-/Baa3), the report noted. For instance, Lianhe Ratings Global provided a higher rating than its foreign rivals on Chinese property developer Agile Group lately (see table below).

Source: Agile Group


"Credit ratings of domestic and global agencies: What drives the differences in China and how are they priced?" White Paper by Bank for International Settlements in 2017

An ex-employee at the Hong Kong branch of a Chinese ratings company also revealed to AsianInvestor that management and analysts have been known to bow to pressure from their sales team to give potential clients higher ratings.

This approach is “a normal way” to gain new business from rivals, he said.

This article has been edited to that a portion of UBP's balanced multi-asset managed strategies was moved from Asian investment-grade into US senior loans after the recent bond defaults in China.

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