context: It is an open secret that the state’s credit rating agencies are prone to influence: ratings are generally bloated, while hignly-rated SOEs can still default. Given that, their ratings undermine market pricing, resource allocation, and even financial stability. Eyeing the long term, the new regulations aim at making ratings more independent, transparent and reliable.
On 6 August, five ministrial bodies led by PBoC (People's Bank of China) issued ‘Notice on promoting the healthy development of the bond market credit rating industry’, specifying
- strengthening the systemic construction of rating methods
- rating quality
- level of differentiation
- independence
- improving corporate governance and internal control mechanisms
- enhancing information disclosure
- increasing penalties for violations
- tightening supervision and management of credit rating agencies
- promoting fair competition in the industry and encouraging issuers to appoint two or more credit rating agencies
The following goals are set
- credit rating agencies should build a long-term rating quality verification mechanism with
- probability of default as the core
- consistency, accuracy and stability
- backtracking ability in case of major rating changes
- reducing the proportion of high ratings to within a reasonable range
- establishing and starting to use a rating method that can achieve reasonable credit differentiation before end 2022
With the new policy, rating agencies may become more cautious in the face of greater regulatory pressure, argues Ming Ming 明明 CITIC Securities Research Institute deputy director.
A rating verification mechanism centred on the default rate means a major reform of the current rating system, points out Zhou Maohua 周茂华 Everbright Bank senior financial market analyst.