China asset managers review bond holdings as regulators curb AAA rating glut

Chinese asset managers are reviewing their bond holdings to identify issuers at risk of rating downgrades after regulators stepped up efforts to curb the overconcentration of AAA ratings, Bloomberg reported on Monday, citing people familiar with the matter.

The people said that around a dozen institutions, including mutual funds and banks, are conducting independent assessments on whether their holdings could be vulnerable to near-term rating downgrades or withdrawals. They added that after completing their internal credit risk assessments, some institutions may consider reducing their positions if the relevant issuers undergo rating adjustments.

Securities Association of China's data shows that as of the end of the first quarter of this year, among more than 6,000 credit bond issuers in the country, AAA-rated entities accounted for 27 percent, while AA+-rated entities accounted for 32 percent. By comparison, according to data compiled by Bloomberg, less than one percent of outstanding US corporate bonds carry an AAA rating from any of the three major international rating agencies.

The report also noted that China's credit rating standards have been overly lenient and ratings have been inflated for years, making it difficult for investors to distinguish issuers' true credit quality. As regulators step up efforts to overhaul the quality of the rating industry, a number of companies have chosen to terminate their ratings. China Industrial Securities International Brokerage’s brokerage analyst cited in a recent research report that as scrutiny over domestic credit ratings intensifies and the annual rating review deadline approaches, some issuers may withdraw their ratings or delay disclosures to avoid potential downgrades.

Bloomberg reported last week, citing sources, that the People's Bank of China is pushing domestic rating agencies to curb the excessive concentration of AAA ratings. Issuers whose bond yields exceed the yield of comparable government bonds by more than 200 basis points may face a higher risk of losing their AAA ratings. A research report by CITIC Group showed that, using a spread of more than 200 basis points between bond coupon rates and Chinese government bond yields as a benchmark, the outstanding stock of bonds issued by "high-deviation AAA-rated issuers" from 2025 onward is approximately 706.5 billion yuan (HK$815.13 billion).
 

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