Chinese rating agencies back state-owned enterprises amid wave of defaults

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Chinese credit rating agencies are maintaining their triple A scores for struggling state-owned enterprises, even as a spate of defaults spill over into the country’s $ 4 billion corporate debt market.

Only five of over 5,000 Chinese companies have been cut below double A by national rating agencies since Yongcheng Coal and Electricity Holding Group, one of the country’s largest coal groups, launched a series of defaults. payment last month, depending on the data provider. Wind.

Double A ratings are crucial in China, as groups with lower ratings cannot issue publicly traded debt. Over 98 percent of the country’s outstanding bond issuance is backed by issuers rated double A or higher. Since defaulting, Yongcheng has become one of the few companies to be relegated below that bar.

Analysts said the reluctance to downgrade companies reflects the influence of politics on Chinese credit markets. For market-dominant SOEs, a double A rating or higher is often based more on the assumption that authorities will always bail out government-linked enterprises rather than their business fundamentals. Some investors have said they do not trust local ratings.

“Chinese rating agencies are even worse than [those] in the United States, ”said Andrew Collier, Managing Director of Orient Capital Research in Hong Kong. “They are not only beholden to the customer, but also [to] the government.”

Rating agencies such as China Chengxin or CSCI Pengyuan apply a letter-based scale that resembles those of international peers such as S&P Global or Fitch Ratings.

But fierce competition between Chinese agencies, most of which are state-controlled or have government links, leaves them with little incentive to rate their clients below double A or risk losing business.

Before November, only five Chinese state-owned companies had defaulted in 2020, according to Fitch. That number has since risen to eight.

“The absence of downgraded ratings is only one of the privileges enjoyed by state-owned enterprises,” said Bruce Pang, head of macro and strategic research at investment bank China Renaissance, who points out that Government-linked groups also generally enjoy much better access to capital markets. than their private counterparts.

Investors have started to view triple A-rated debt in China as riskier, although rating agencies have not. The average yield on bonds rated double A or higher has jumped about 0.4 percentage point since Yongcheng defaulted on November 10. Yields on triple A rated debt recently hit their highest level in a year.

“It’s going to have an impact,” said Jenny Zeng, co-head of Asia-Pacific fixed income at AllianceBernstein, of recent defaults and higher returns. She added that while the shore logs were not “completely unnecessary.” . . from a credit point of view, I just prefer to do my own job ”.

Analysts expect more failures of government-related entities in China, as Beijing is more willing to let certain groups fail in part to encourage investors to better assess the risks associated with these companies.

Hayden Briscoe, head of fixed income for Asia-Pacific at UBS, said that still would not cause a wave of significant downgrades from Chinese rating agencies.

But from now on, he said, investors will likely pay a lot more attention to “minus, plus and apartments” in the double A to triple A plus range.

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