China's Bond-Exchange Giant Shows Domestic Ratings Too High

Updated on
  • ChinaBond making push for assessments based on pricing
  • Some 50% of ChinaBond ratings are lower than local peers

China’s bond-rating companies have long had credit assessments that appear alien to global investors. Just as the door now opens for overseas competitors, a recent domestic entrant is trying to gain traction for estimates that are much less glowing.

And the new player is no novice. It’s ChinaBond, which operates the largest clearing house for Chinese fixed-income securities. The company has stepped up efforts to promote its so-called implied ratings, which it started compiling in 2008. The scores are mainly based on market prices, which reflect the credit risks perceived by investors, according to Liu Fan, vice president at China Central Depository & Clearing Co., as firm is officially known.

“Domestic ratings aren’t so objective,” said Beijing-based Liu, who is also president of ChinaBond’s pricing center, the unit that produces the company’s assessments. “Sometimes the ratings don’t truly reflect the real credit risks,” he said in an interview this month.

About 41 percent of China’s domestic corporate bonds are graded AAA, according to data compiled by Bloomberg based on ratings issued by four major domestic agencies including Dagong Global Credit Rating Co. In the U.S., the percentage is about 6 percent, based on the main international firms.

While a skewed rating scale hasn’t stopped China from building the world’s third-largest bond market -- now approaching $10 trillion -- it could give foreign investors pause. Policy makers have increasingly opened the door for overseas funds, which hold less than 2 percent of onshore bonds. As part of that initiative, in July they gave a green light to S&P Global Ratings and other international agencies to set up wholly owned units to rate bonds in China.

Prices, News

State-owned ChinaBond says that 50 percent of its ratings were lower than those provided by local peers as of Aug. 31. Along with bond prices, ChinaBond considers public financial information, news reports and even market rumors in reviews of credit ratings, Liu said.

Bloomberg LP, the parent of Bloomberg News, also competes in providing credit-analysis tools.

After the onshore bonds of Dalian Wanda Commercial Properties Co. traded more cheaply than those of some junk-rated issuers, ChinaBond cut its rating on bonds issued by the biggest unit of one of China’s giant conglomerates to A+. Dagong still has them at AAA. Dagong hasn’t responded to questions sent by Bloomberg seeking a comment on the rating difference and the intensified competition.

Moody’s Investors Service and S&P Global Ratings cut the Wanda unit’s offshore grade to junk after regulators increased scrutiny on conglomerate’s overseas businesses.

ChinaBond’s starting point isn’t to dismiss the local competition, however.

“Local rating agencies’ ratings aren’t entirely senseless,” said Liu. “We will judge whether it’s different from reality. We will compare the ratings with most agencies’ ratings on similar companies in the same industry.”

Liu claims that ChinaBond’s implied ratings have received good feedback from investors, and even sees the potential for overseas recognition. Asia’s booming dollar bond market is one area for potential competition, where Chinese issuers and buyers are becoming the dominant players.

Liu said his firm is the first to disclose to the public ratings on privately placed Chinese bonds. The public can view rating changes in ChinaBond’s WeChat daily report and paying investors can access all the ratings, covering both exchange and interbank markets, through special channels and authorized information providers.

ChinaBond announces the ratings every day after the market close, according to Liu.

“We created the rating standards,” said Liu. “We believe they will become international standards.”

— With assistance by Judy Chen

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