S&P Global Ratings has raised concerns about the prevalence of elevated credit ratings in China’s domestic bond market as Beijing promotes the bond market to foreign issuers and investors.
Speaking at a capital market forum in Shanghai, Christopher Lee, regional practice lead for Asia-Pacific at S&P Global Ratings, said the onshore market assigns top-tier ratings to an excessive number of issuers. He highlighted instances in which foreign borrowers that carry a global rating of 'B' are given 'AAA' ratings when they issue panda bonds in China.
Lee noted the sharp contrast in risk implication between those grades. He pointed out that a 'B' rating corresponds to a five-year cumulative default rate of 15.34 percent, while 'AAA' denotes an extremely low probability of default. "Risk is being introduced into the domestic market," Lee said. "This issue will come to a head one way or another."
Broad data cited by market participants shows that nearly 90 percent of more than 6,500 credit bond issuers in China carry AA ratings or higher. By comparison, the share of issuers with such high ratings in the United States stands at 4.4 percent, according to Caitong Securities.
Chinese authorities have already taken steps to address the discrepancy. Since April, the central bank has held closed-door meetings urging credit rating agencies to reduce the concentration of AAA ratings, according to sources familiar with the guidance. That initiative has led to a number of rating downgrades and withdrawals.
The scale of the issue is underscored by the size of China’s credit bond market. At 37 trillion yuan, or roughly $5.5 trillion, the market is a growing source of corporate financing as authorities seek to broaden participation by foreign issuers and investors.
Lee said regulators are "moving in the right direction" but added that a broader spectrum for credit differentiation is still required as the onshore bond market opens further to foreign participants. His remarks emphasize the tension between attracting international capital and ensuring consistent, risk-reflective credit assessments.
Summary
S&P Global Ratings warned of inflated credit ratings in China’s onshore bond market, citing cases where foreign issuers rated 'B' globally receive 'AAA' marks when issuing panda bonds. Nearly 90 percent of over 6,500 issuers in China have AA or higher ratings, a level far above the 4.4 percent observed in the United States. Since April, the central bank has engaged rating agencies to reduce AAA concentration, prompting downgrades and withdrawals. The 37 trillion yuan bond market is increasingly important for corporate financing as China seeks foreign participation.
Key points
- Too many onshore issuers in China receive top-tier ratings, raising concerns about credit assessment quality - sectors affected include the bond market and corporate financing.
- Foreign issuers with global 'B' ratings have obtained 'AAA' marks when issuing panda bonds, despite 'B' carrying a five-year cumulative default rate of 15.34 percent - this impacts investor risk evaluation and cross-border issuance.
- Regulatory pressure since April has prompted rating downgrades and withdrawals as Chinese authorities push rating agencies to lower AAA concentration - this affects rating agencies and financial regulators.
Risks and uncertainties
- Persistently inflated ratings could introduce underappreciated credit risk into China’s domestic bond market, impacting investors and banks exposed to these bonds.
- If credit differentiation remains limited, foreign investors and issuers may face mismatched risk signals when entering the market, complicating cross-border capital flows.
- The ongoing process of downgrades and withdrawals creates short-term uncertainty for issuers and market participants as rating profiles are adjusted.