Chinese Credit Rating Agencies in the Firing Line


We have reviewed the credit rating situation in China extensively here in Financial Regulation Matters (see here) and it is well known that the Chinese rating agencies are under massive pressure, both from the Chinese State and also the opening up of the domestic marketplace to the international credit rating agencies for the first time. However, the underlying political dynamics within the Chinese marketplace means that the credit rating agencies within the country are between a rock and a hard place and, yesterday, one of the Chinese credit rating agencies found themselves being thrown between the two.

 

The Chinese domestic marketplace is in a precarious position at the moment, as a number of defaults rock the confidence in domestic corporate debt market. Whilst this is a trend across the world of course, there have been a number of high profile defaults recently within a relatively short space of time. What increases the pressure is that a number of ‘State-Owned Enterprises’ (SOE) are now joining that list, including Yongcheng Coal and Huachen, the Chinese entity who have partnered with BMW to manufacture in the country. The common assumption has always been that if these SOEs were to fail, then the local government would step in to bail them out. However, in the current climate, that has not been the case. Whilst this belief that the SOEs were ‘too big to fail’ will no doubt cause massive issues, there is a credit rating dynamic that is currently in the process of coming to light and will no reverberate around the domestic market. For a company to issue public debt in China, it must be rated Double-A or above. The Financial Times reports that just 5 out of 5000 companies have been downgraded below the AA threshold, and that more than 98% of the country’s outstanding debt is rated at AA or above. The flow of capital within the Chinese marketplace is vital to the world’s 2nd largest economy, which can explain why the credit rating agencies are so reluctant to downgrade the companies, even in the face of massive criticism for not doing so. However, as the rate of defaults increase, something has to give. The first sign that this has already started came yesterday, when it was announced that a former general manager of the Golden Credit Rating Agency is to be prosecuted by the Chinese Authorities. This is for allegedly taking ‘massive’ bribes, and comes a day after the People’s Bank of China affirmed that it was improving and increasing its supervision of the domestic industry. Then, today, the Chinese State went further and suspended Golden Credit and would not allow it to take on new business for at least 3 months. The Authorities state that the agency had been issuing artificially high ratings and, ultimately, had ‘constrained the high quality development’ of the country’s bond market. Golden Credit, in response, labelled it a ‘political’ move that was designed to scapegoat the agency and set an example.

 

Either way, the trajectory of the Chinese domestic marketplace is likely set in stone. The agencies have no authority in the eyes of external investors and, increasingly, they are losing it domestically. That means that either a. there will have to be a root-and-branch level of reform undertaken within the domestic marketplace which includes, somehow releasing the political pressure within the country, or b. the international credit rating agencies will begin their assault on the domestic marketplace and really establish themselves, so much so that the domestic rating industry dwindles anyway. The first is very much unlikely, particularly as the political pressure will only grow stronger as the country continues to vie to be the world’s superpower. The second is also unlikely, as the international credit rating agencies that have gained access have already declared that they will not be operating their usual methodologies, but China-specific models which, presumably, will be sensitive of the political framework that exists in the country. But, something has to give. What that will be we do not know, but there will likely be more casualties in the domestic credit rating market as the country tries to show that this was the work of a few bad apples, rather than a systemic problem.

 

Keywords – China, credit rating, politics, Golden Credit Rating, @finregmatters

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