When things go wrong in the bond market, it’s normally the rating agencies that end up in the firing line. Investors always blame them for failing to issue timely warnings.
That’s true for any global bond market, but especially so in China where there’s a multitude of newer rating agencies competing for business from the very companies they’re being paid to rate. That inherent conflict of interest is usually balanced by the fact that rating agencies ultimately only thrive if investors trust their credit reports.
Progress has been mixed as the latest annual report from the bond market’s self-governing body NAFMII (National Association of Financial Market Institutional Investors) makes clear.
On the positive side, individual analysts are now more experienced. NAFMII says that 60% of China’s 1,498 credit rating analysts at 13 agencies now have more than three years experience. That’s up 5.25 percentage points year-on-year. It also says that even through the pandemic Chinese rating agencies continued to organise educational forums and seminars to “benefit industry development”.
However, overall the picture is not so good. At the end of last year, one of the country’s top ratings agencies, China Chengxin International, was banned for three months after Yongcheng Coal defaulted. The state-owned group failed to repay Rmb1.03 billion ($153 million) of debt that fell due in November.
At the time, it had the highest possible AAA rating from China Chengxin. The agency swiftly downgraded it to a B rating, but this was ‘after’ rather than ‘before’ the fact. NAFMII said that the agency, in which Moody’s holds a 30% stake, had missed a lot of red flags.
NAFMII also highlighted issues at Dagong International, citing “inadequate records and sloppy file management”. It noted that the agency was responsible for the largest adjustment for any issuer in a single rating action after it downgraded Hunan’s New Hualian Holdings by an incredible 17 notches from AA+ to C (two to three notches is a big move in international markets).
Li Yong, President of China Securities Pengyuan Credit Rating recently acknowledged that the industry has much improving to do. He said that while Chinese rating agencies have been around for 30 years, they’ve really only served the capital markets for 15 years and managed real default risk for only six.
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