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Reductions in the national rating of corporate bonds in China have more than tripled this year, underscoring Beijing’s efforts to reduce risk in the country’s $ 17 billion credit market after several large defaults. renom.
International rating agencies and fund managers have long criticized China artificially high corporate credit ratings and low delinquency rates, which point to the lack of transparency and the assumption that the government will rescue troubled companies.
But 366 bonds were downgraded during the first four months of 2021, compared to 109 in the same period last year, according to data provider Wind.
The increase followed a warning in November by Liu He, China’s deputy prime minister, that Beijing would have “zero tolerance” for corporate wrongdoing after a series of default values by state-owned enterprises.
Regulators have put pressure on debt subscribers, national rating agencies and auditors in an effort to encourage faster disclosure of risks, analysts said.
Among the hundreds of rebates this year were bonds issued by HNA, the former purchasing conglomerate that has faced debt and liquidity problems for nearly five years, and Tsinghua Unigroup, a major investor in computer chips that has faced issues about bond repayment since 2018.
Charles Chang, China’s leader at S&P Global Ratings in Hong Kong, said the misrepresentation of risks by Chinese companies was “starting to improve.”
“If this regulatory impulse works, you should see increased timely action marking the underlying anxiety… This does not mean that there is an increase in anxiety, it just means that there is an increase in the indication of that anguish, ”Chang said.
S&P noted that more than 80% of local ratings of issuers of non-financial firms in China were classified as double A. Below this grade, Chinese groups cannot issue exchange-traded debt.
Five national rating and audit firms contacted by the Financial Times did not respond to requests for comment.
Chinese regulators have struggled for years to improve transparency in the country’s corporate debt market. Researchers have said increased scrutiny of regulators has sharpened for state-debt-laden companies.
The focus has sharpened since Yongcheng’s state-backed coal and electricity bond defaults in November sent shock waves through China’s financial system.
Some of the breaches could also have been due to the economic damage caused by the coronavirus pandemic, analysts said, despite China’s return to pre-pandemic economic growth levels in the last quarter of 2020.
Xiaoxi Zhang, an analyst at Gavekal Dragonomics, said Chinese leaders had identified “hidden debt” as a priority this year and were working to change market perceptions that many companies had an “implicit guarantee” that state would rescue them.
“The government wants to take advantage of the strong momentum of post-Covid rebound growth to address structural issues,” he wrote in a research note.
“But it is also because the current tightening of credit and the withdrawal of supportive economic policies can lead to wider financial strain if hidden debt is not managed well.”
However, S&P’s Chang noted that delinquency rates in China remained relatively low. “China’s delinquency rates should double or triple to reach the level seen in the US, Europe and emerging markets,” he said.
Additional reports of Sherry Fei Ju in Beijing
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