Credit rating agencies in China under pressure from bond defaults | Fund managers

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China’s new regulations for credit rating agencies are a welcome step to improve oversight of the scandal-ridden industry, experts said, but a rating gap between those of local agencies and foreign players continues to grow. frown.

August 6, five central government bodies including the China Banking and Insurance Regulatory Commission and the China Securities Regulatory Commission jointly issued rules detailing the requirements for rating business transactions, corporate governance and disclosures, as well as sanctions in the event of professional misconduct in the sector.

For example, the rules require rating agencies to reduce the proportion of well-rated bond issuers, to be more stringent in credit rating based on the probability of default and to consider situations similar to those of a defect.

The rules also required rating agencies to avoid conflicts of interest, for example by isolating credit rating services from other operations.

Beijing has been tightening industry rules since 2017, but high-profile bond defaults by property developer China Evergrande and bad debt manager China Huarong Asset Management continued this year, raising concerns over the credit system. country credit, while placing the credibility of rating agencies under the microscope.

Paras Gupta, UBP

“Asian credit spreads have widened following the rise in default rates in China,” noted Paras Gupta, head of discretionary portfolio management for Asia at Swiss private bank UBP.

After recent defaults, the company shifted part of its balanced managed multi-asset strategies from Asian investment grade to senior US loans, he added.

“Even though we believe that the systemic risk at this stage is limited and that contagion to larger sectors and regions should be avoided, we have decided to move out of our quality Asian holdings in favor of senior US loans at an attractive yield. and lower duration risk, ”he added. noted.

READ ALSO : Market Opinions: Are Chinese Bond Defaults Turning Investors Off?

FOREIGN PLAYERS

The rating industry has become more and more open in recent years. As Chinese rating companies, such as China Chengxin, travel overseas to expand their overseas business, foreign names have been given the green light from authorities to provide onshore rating services in China.

Danny Chen,

Fitch (China) Bohua

Fitch reviews in May of last year became the second foreign company in China authorized to operate a wholly-owned non-Chinese credit rating agency, Fitch (China) Bohua, after obtaining a license to rate fixed income securities in the country’s interbank market, in the framework of a broader easing of foreign policy access to its financial markets.

S&P Global was the first rating company to receive regulatory approval to establish a wholly owned unit in China in January 2019.

Danny Chen, CEO of Fitch (China) Bohua, said AsianInvestor that “the company welcomes the latest initiative of Chinese regulators to strengthen the supervision of Chinese credit rating agencies and increase transparency, which is a positive step for the development and internationalization of the industry.”

“We will update company policies as necessary and comply with all regulatory requirements and expect the new requirements to raise the standards of rating agencies and promote healthy growth in the Chinese bond market,” said Chen, noting that the new rules could bring a revolution. from “rating level” to “rating quality”.

Fitch (China) Bohua currently has 30 employees in Beijing and plans to recruit more people over the next 12 months, he added, without providing an exact number.

At the end of 2020, S&P Global (China) Ratings had 50 people in employment. Besides expanding the team, the company is also in the process of establishing a unique rating scale dedicated to the Chinese market, a spokesperson for the rating company said. asian investor, without developing further.

CONFLICT OF INTEREST

In bond markets around the world, national agencies tend to give local companies higher ratings than global agencies.

For example, the Japanese and Korean corporate bond markets exhibited differences in rating scales between national and global agencies, according to a 2017 working paper from the Bank for International Settlements.

However, the rating differences are particularly striking in China. The median and average of national ratings are both seven notches above global ratings (AA / Aa2 vs. BBB- / Baa3), the report notes. For example, Lianhe Ratings Global recently assigned a higher rating than its foreign competitors to Chinese property developer Agile Group (see table below).

Source:

“Credit Ratings of National and Global Agencies: What Determines Differences in China and How Are They Valued?” »White paper by Bank for International Settlements in 2017

A former employee of the Hong Kong branch of a Chinese rating company also revealed AsianInvestor that management and analysts are known to give in to pressure from their sales team to give potential clients higher marks.

This approach is “a normal way” to get new business from rivals, he said.

This article has been edited to reflect that part of UBP’s managed multi-asset balanced strategies have been moved from Asian investment grade to US senior lending after recent bond defaults in China.

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