There are more than 50 credit rating agencies around China. But
all the fledgling corporate market in Shanghai needs is a few good
ones that can win the trust and respect of both issuers and
investors.
The multi-trillion dollar bond market in the United States is
largely served by no more than three such firms.
"What we in China lack is a unified standard of rating that
complies with the highest international standards and at the same
time takes into account China's particular business conditions,"
says Yan Yan, vice-chairman of China Chengxin Securities Rating Co
Ltd, which is widely considered to be a leader in the credit rating
field.
"While learning from international credit rating standards,
Chinese agencies are also trying to incorporate the different
conditions of Chinese companies and industries," Yan adds.
Previous efforts by Yan and other credit rating experts to
establish such a system received only passing interests from the
corporate sector because bond issues were limited to large
State-owned enterprises. In addition, the repayment of interest and
capital by the issuers of those bonds is guaranteed by banks.
Things are changing. Under new rules introduced by the China
Securities Regulatory Commission in June, all Chinese corporations
that can meet the specified requirements can issue bonds without
bank guarantees. At least two enterprises have issued bonds under
the new rules and more are expected to come.
Such activities have thrust credit rating agencies onto center
stage. The role they play is widely seen to be crucial to the
development of China's long-term capital market, which is expected
to become a major source of funding to finance future expansion of
thousands of Chinese enterprises.
"The establishment of a sound credit rating system is essential
to strengthening the infrastructure of the bond market," says Li
Fei, an economist at KBC Goldstate Asset Management in
Shanghai.
Analysts say further efforts should be made to associate credit
ratings with the pricing of corporate bonds because in mature
markets, the ratings from an independent third party are decisive
in setting the coupon levels of corporate bonds.
"The corporate bonds issued that are guaranteed by banks cannot
truly reflect the credit status of the issuers and undermines the
market mechanism in the allocation of credit and prevents the
credit market from pricing risks effectively," says Li of KBC.
To date nearly all corporate bond issues in China came from
large State-owned enterprises that have the highest rating of AAA.
In nearly all cases, credit risks are borne by the banks rather
than investors.
Follow-up ratings have yet to be developed after a company
issues an initial corporate bond. It has prevented investors from
making longer-term assessments of a company's credit status and
building awareness of the potential credit risks involved, analysts
say.
According to common international practice, the default rate in
a bond market is widely accepted as a barometer in assessing the
accuracy of credit ratings. But analysts say at the present stage
of development, China's debt market is lacking in an objective
default rate curve, which has to be calculated by longer-term
historical data.
"By providing more comprehensive historical market data, the
further development of China's bond market itself will in turn
promote the functioning of the credit rating system," says Yan of
China Chengxin.
Bond experts and analysts advise the inclusion of corporate
bonds with differing credit ratings to further expand the market
scale and attract more investors with varying risk appetites.
"China's corporate bond market is not complete without the
participation of small and medium-sized enterprises," says Gong
Yangshu, a professor on finance of Shanghai University of Finance
and Economy.
"Compared with the large companies with high credit ratings,
small- and medium-sized enterprises have more urgent need for
direct financing through issuing corporate bonds."
"There are growing numbers of medium-to-small enterprises
approaching us to consult with bond issue plans," says Yan of China
Chengxin.
"With the further expansion of corporate bond market, more and
more enterprises with diversified credit ratings are expected to
participate."
Small and medium-sized enterprises (SMEs), which are the engines
of economic growth and job creation in China, have relatively
little access to bank loans and the corporate bond market.
Despite their critical role in the economy, SMEs for long were
forced to rely on retained earnings and informal private financing
channels to expand their businesses.
Experts and analysts also warn that risk prevention should be
put at premium to well protect investors' interest when lower
rating bonds are introduced to the market.
(China Daily December 3, 2007)
