SHANGHAI, Sept 3 - Generous credit assessments are creating vulnerabilities within China’s rapidly expanding bond market, according to Christopher Lee, regional practice lead for Asia-Pacific at S&P Global Ratings.
Speaking at a capital market forum in Shanghai, Lee said that an outsized share of issuers are clustered at the top of the domestic rating ladder. "Too many issuers are concentrated in the upper layer of the rating scale," he said, warning that such concentration masks risk in the onshore market.
Lee illustrated the discrepancy with an example of foreign borrowers: if an issuer carries a 'B' rating on the global scale but is assigned 'AAA' when selling panda bonds into China’s domestic market, the onshore market is effectively absorbing higher-risk credit under an appearance of top-tier quality. He added: "If a foreign issuer is rated 'B' globally, but 'AAA' when it sells so-called panda bonds in China’s onshore market, it means 'risk is being introduced into the domestic market.'"
The firm’s published statistics were cited to underline the point. A 'B' rating sits near the bottom of the global investment-grade spectrum and, according to S&P Global Ratings data, has a five-year cumulative potential default rate of 15.34%. By contrast, an 'AAA' rating denotes extremely low default risk.
Official figures show that of more than 6,500 credit bond issuers in China, nearly 90% are rated AA or higher. That degree of top-tier concentration stands in stark contrast to the United States, where just 4.4% of issuers hold AA or higher ratings, according to Caitong Securities.
Chinese regulators have responded by pushing to improve rating quality. Since April, the central bank, which oversees the interbank bond market, has been urging credit rating agencies to reduce the clustering of AAA ratings through a series of closed-door meetings, sources with direct knowledge of the guidance told market participants. That regulatory pressure has already resulted in a series of rating downgrades or withdrawals.
The scale of the market underscores the stakes: the credit bond market in China totals about 37 trillion yuan ($5.5 trillion) and has become an increasingly important channel for corporate financing as Beijing seeks to attract more foreign issuers and investors.
Lee said regulators are taking steps he considers constructive: "They are moving in the right direction." He stressed that as the market opens further to foreign participants, regulators and market actors need a fuller range of credit differentiation so that risk is properly reflected across the spectrum. "This issue will come to a head one way or another," he warned.
Implications and context
- Concentration of top-tier ratings in China’s bond market may obscure credit risk for domestic investors and lenders.
- Regulatory efforts to reduce AAA clustering have already produced rating adjustments, indicating an active policy response.
- The entrance of foreign issuers into the onshore market highlights the need for consistent cross-border credit differentiation.