S&P Global Ratings warns of risks from China’s generous credit ratings

SHANGHAI, Sept 3 (Reuters) – Generous credit ratings are baking risks into China’s booming bond market as Beijing attracts foreign issuers, S&P Global Ratings’ Asia-Pacific ratings chief said on Thursday.

“Too ​many issuers are concentrated in the upper layer of ‌the rating scale,” Christopher Lee,  regional practice lead for Asia-Pacific at S&P Global Ratings, told a capital market forum in Shanghai.

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,” he said.

A ‘B’ rating ⁠is the second-lowest rating category in the global scale, and has a five-year cumulative potential default rate of 15.34%, according to S&P Global Ratings. AAA is the top-notch rating that indicates ​extremely low risk of default.

“This issue will come to a head one way or another,” Lee said.

The latest official data shows ⁠that of more than 6,500 credit ⁠bond issuers in China, nearly 90% are rated AA ​or higher. That compares with just 4.4% in the United States, ​according to Caitong Securities.

Lee’s warning comes as Chinese authorities have ‌launched a fresh campaign to improve credit rating quality.

Since April, China’s central bank, which oversees the interbank bond market, has been urging credit rating agencies to reduce the concentration of top-tier AAA ⁠ratings through a series of closed-door meetings, according to sources with direct knowledge of the guidance. That push has led to a series of ⁠rating downgrades or ‌withdrawals.

The stakes are high as the 37 trillion yuan ($5.5 ⁠trillion) credit bond market has become increasingly important ​for corporate ‌financing, and China woos foreign issuers and investors ​to the ⁠market.

Lee said that Chinese regulators “are moving in the right direction.”

As China opens its bond market wider for foreign issuers, “one of the things that needs to happen is to create that spectrum for credit differentiation,” Lee said.

(Reporting by Shanghai Newsroom; Editing by Tom Westbrook in Singapore ​and Hugh Lawson)