PBoC, NDRC, the Ministry of Finance (MoF), CBIRC, and CSRC jointly drafted a notice on promoting the high quality and healthy development of the credit rating industry in the bond market for public consultation on March 28, as reported by Caixin on March 29. The main contents include five aspects: promoting rating quality; improving corporate governance; strengthening information disclosure and market restraint mechanism; optimizing the rating ecosystem; as well as increasing the punishment of violations.
Since the end of October 2020, Brilliance Group [1114:HK], Yongmei Group, and other AAA-rated state-owned enterprises (SOEs) defaulted or was downgraded, which aroused strong doubts about the pre-warning function of credit rating in the bond market. According to Sina, in 2016, 2017, 2018, 2019, and early 2020, the marginal default rates of SOEs’ bonds in their first investment period were 0.23%, 0.00%, 0.20%, 0.29%, and 0.25%, respectively, with the highest reading in 2019. Affected by Yongmei Group, the 2020 marginal default rate was the second-highest in the past five years.
According to Caixin, at present, debenture bonds issued by AAA and AA+ rated entities account for about 80% of the debenture bond market, which are mainly central enterprises, local large SOEs, and investment platforms for city development. In light of this, large-scale downward ratings of SOEs will cause market turbulence, as many issuers release new bonds to repay old bonds. Once the rating is lowered to below AA -, it will be difficult for many local SOEs and urban development investment platforms to refinance, increasing their default risks. Therefore, rating downgrade should be taken gradually, as the Central Economic Working Conference emphasized that the macro policies in 2021 should be continuous, stable, and sustainable. From the perspective of improving the rating quality, credit rating agencies should build a rating quality verification mechanism with default rates as the core, and gradually reduce the proportion of highly rated entities to a reasonable range.