New steps to improve standards of credit ratings

China has come out with steps to improve the standards and regulations of credit ratings and urged companies to improve their ratings methodology, strengthen corporate governance and bolster information disclosure.

According to a draft document jointly published by five departments, including the People’s Bank of China, the central bank, and the Ministry of Finance, on Sunday, China aims to improve the quality of credit ratings in terms of standards, independence and quality control, underlying consistency, accuracy, and timeliness of the ratings decisions. Credit ratings agencies, acting as independent third-party agencies, need to see their own reputation as “lifeline” and fully activate their role of risk disclosure, it said.

The new rules were rolled out following a series of defaults by some companies that disrupted the country’s $4.4 trillion corporate bond market.

The PBOC said in a statement that the new rules are also designed to create a better environment in which bond issuers will not interfere with the credit rating decisionmaking process. It will also enable investors to rely on multiple ratings sources.

Zhang Xu, chief analyst at Everbright Securities, said the new guideline will help address some of the pressing issues in the credit ratings market. Though the credit bond market has been too reliant on credit ratings, there has not been much standard assessment or evaluation for the ratings decisions.

Ming Ming, head of fixed-income research at CITIC Securities, said that some false high ratings, insufficient classification and frequent default risk failures are some of the major issues facing China’s credit rating market. The fact that some defaults were caused by several high-rating firms last year has shown that credit ratings agencies are failing in their duties, and placing obstacles in the healthy and steady development of the bond market.

Noting that the quality of credit ratings is the cornerstone of China’s financial market, he said that such an overhaul will lead to a process during which ratings for a number of firms will go down and lead to repricing of the credit market. The impact will be short-term, and will contribute to the long-term and healthy growth of the country’s financial market, said Ming.