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Almost all of the ratings directly awarded to new corporate bonds in China are now triple A, part of a long-term shift that has intensified alongside signs of official efforts to exclude riskier borrowers.
Figures from Goldman Sachs and Chinese data provider Wind that offer a snapshot of the country’s vast credit markets show that 90 per cent of rated corporate bonds issued in the first half of this year were given the top rating, more than in any full year in records going back to 2008.
So-called rating inflation has for years raised concerns over the reliability of China’s domestic credit rating industry. In 2016, less than half of rated bonds received a triple A rating.
The picture is complicated by the very large number of bonds that receive no individual rating, although data on separate issuer ratings applied to almost all borrowers shows that a majority of them were rated triple A last year.
“Over the long horizon, rating inflation is getting worse,” said Kaihua Deng, associate professor of economics and finance at Renmin University.
Defaults have all but disappeared from mainland China’s bond market this year, despite a four-year crunch in the country’s huge property sector and trade tensions with the US, amid a focus on stability from Beijing.
“The central government is trying to limit the weaker issuers from tapping the onshore bond market,” said Zerlina Zeng, head of Asia credit strategy at CreditSights.
She added that weaker local government financing vehicles, with ratings of double A or below, were no longer able to access the market as Beijing did “not want to see any defaults”.
Ratings for bonds and issuers in China are provided by domestic agencies, some of which are linked to the state. The People’s Bank of China lists dozens of companies that are registered to provide ratings in the country.
Deng said the growing share of top-tier ratings did not indicate an improvement in credit quality, given that borrowing costs have remained largely stable compared with government debt, rather than falling.
“If quality is really improving, that should not happen,” said Deng, who has published research on China’s ratings. “Investors, they are not stupid.”
He added that companies also “shop” across multiple agencies to obtain better ratings, particularly private companies with higher borrowing costs than their state-owned counterparts.
China’s ratings inflation has widened the gap with other major bond markets, where a much smaller slice of companies earn triple A status. The Goldman breakdown of bond ratings stops at A minus given the negligible number of bonds rated below that level.
More than 80 per cent of the Rmb7tn ($976bn) in bonds issued in the first half of this year did not receive a direct rating, according to Goldman, although almost all borrowers have an issuer rating not captured in the data. Deng estimates that 54 per cent of issuer ratings were triple A in 2024, down from a peak of 60 per cent in 2022 but much higher than a decade ago, while a further 32 per cent were rated double A plus.
A separate Financial Times analysis of the main category of corporate bonds in China, representing about Rmb4tn of debt and thousands of individual issues, found no record of any bond rated below A minus since 2022 and only a handful in the years before that.
Credit ratings typically rank debt on a scale from triple C, which implies a significant risk of default, to triple A, which implies extremely low risk. They played a growing role in China’s nascent domestic markets in the 2000s as part of a move to align them with international standards.
The first corporate bond default in China occurred as late as 2014, at a time of overt pressure from Beijing to reform a state-dominated market. In contrast, government edicts in recent years have encouraged state-owned enterprises to avoid missed payments.
The 2020 default of state-owned Yongcheng Coal and Electricity, a triple A-rated utility, sparked extensive scrutiny of China’s domestic ratings and a reassessment of the likelihood of state support.
One employee of a rating agency in the mainland said that, in the past, insurance companies were not permitted to invest in bonds with ratings below double A. Today, such bonds simply “can’t get [the] green light from the regulators”, the person added.
“The government knows that ratings are inflated and below AA bonds are risky,” said Deng.
Fitch, Moody’s and S&P Global, which between them dominate the international rating industry, all have a presence in China but are small compared with their domestic competitors. Moody’s in 2022 closed its analytics business in the country but retains a minority stake in a local agency. Fitch and S&P both operate wholly owned subsidiaries in China.