China is pushing domestic rating agencies to curb the excessive concentration of AAA bond ratings to better differentiate corporate credit ratings across issuing entities, Bloomberg reported, citing people familiar with the matter.
The people said that the People's Bank of China is leading the effort to require regulators to ask rating agencies to screen the issuers they cover and assess whether any no longer meet the updated AAA rating criteria.
Although rating agencies consider multiple factors when deciding to downgrade ratings, issuers whose bond issue pricing relative to the yield of same-maturity government bonds exceeds 200 basis points may face a higher risk of losing their AAA ratings.
China's onshore bond market has long suffered from inflated ratings, weakening the result of credit-rating disclosure. Curbing the excessive concentration of AAA ratings will help improve rating quality, but in the short term, if issuers’ ratings are downgraded, their bonds may face selling pressure in the secondary market, widening the credit spreads of the relevant entities and increasing the cost of future bond financing for companies.
According to regulatory disclosures, as of the end of the first quarter of this year, among more than 6,000 credit bond issuers in China, 27 percent held AAA ratings and 32 percent held AA+ ratings. In contrast, according to data compiled by Bloomberg, less than 1 percent of outstanding corporate bonds in the United States carry an AAA rating from any of the three major international rating agencies.
