China’s securities regulator is proposing to remove a mandatory credit rating requirement on new corporate bond sales to reduce borrowers’ reliance on ratings and is soliciting opinions on such a revision, reported Caixin.
The proposal represents a response to a rash of corporate bond defaults in the last two years by some highly rated companies and scandals involving rating providers with conflicts of interest. Market watchers said the move is in line with market trends and international practices and will help improve rating quality, curb rating inflation and reduce conflicts of interest between rating companies and issuers.
China’s credit rating industry has long been criticized for providing favorable scores for local issuers, downplaying risks and lagging in making rating adjustments. The mandatory credit rating requirement on new bond issuance to some extent reduces the incentive for rating companies to disclose issuers’ credit risks reasonably, a person at a local rating company said.
The new rules would remove a provision that requires issuers to engage a qualified credit rating company to rate new bonds for public sale. Companies will also no longer be required to have AAA credit ratings as a qualification for selling bonds to institutional and retail investors.