Beijing plans to scrap mandatory ratings to help companies hit by coronavirus issue bonds and raise new funds

14-Aug-2020 Intellasia | South China Morning Post | 6:02 AM Print This Post

China plans to remove mandatory credit ratings for companies in a move that will make it easier for them to issue debt and raise funds on the country’s stock exchanges.

The latest in a series of market-based reforms, the loosening of ratings requirements will boost mainland China’s $15 trillion onshore debt market amid an economic slowdown caused by the coronavirus pandemic. The move is also aimed at pushing bond investors to develop their own risk-assessment capabilities.

The China Securities Regulatory Commission is soliciting public opinion until September 6 about the rule change, in a new draft of guidelines about the issuance and trading of corporate bonds listed in Shanghai and Shenzhen.

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Beijing has been working to support companies facing financial hardships in the pandemic’s aftermath. China’s economy, the world’s second largest, shrank 6.8 per cent in the first quarter of this year its first contraction since records began in 1992 as lockdown measures disrupted manufacturing and commercial activity. The outbreak has left thousands of companies desperate for the fresh funds needed to maintain operations.

“By scrapping the requirement for debt issuers to obtain a rating, China is easing the procedure for companies to raise funds,” said Gang Meng, a ratings director at Golden Credit Rating. “It also forces buyers to strengthen their risk-assessment research.”

Currently, all companies seeking to sell notes on the mainland’s interbank market or stock exchanges are required to get a credit rating before they can issue these bonds.

In March, the regulators announced that China’s onshore bond market will carry out a registration-based system to facilitate debt sales. The new mechanism, which is different from the previous approval system, has granted greater freedom to issuers and underwriters.

The removal of mandatory credit ratings will also bring China’s bond market more in line with international practices. In developed bond markets in the West, credit ratings are not mandatory and investors have considerable credit assessment capabilities.

Mainland China’s bond market is smaller than its interbank market, and it is expected that Beijing will eventually expand the reform to cover the latter as well.

“The regulators hope to see more borrowers have the ability to assess the fundamentals of debt issuers,” said Gu Weiyong, the chief investment officer at Shanghai-based asset manager Ucom Investment. “China will also further open up the bond market to foreign investors who better understand risks and investment opportunities.”

There are six rating companies in mainland China Dagong Global, CSCI Pengyuan, Shanghai Brilliance, United, Golden and China Chengxin International. And the removal of the mandatory requirement is expected to prompt these companies to assess bond issuers’ creditworthiness more accurately, analysts said. In the past, some of them have inflated ratings by at least one notch under pressure from borrowers, as reported by Bloomberg.

Global names such as S&P Global Ratings and Moody’s Investors Service also have presence in the mainland Chinese debt market. But their portion of business “appears to be negligible” so far, according to an official with S&P.


Category: China

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