China’s central bank has told domestic credit rating agencies to stop handing out top grades like participation trophies. The People’s Bank of China issued directives urging firms to curb the concentration of AAA ratings in the country’s bond market, a move that signals Beijing is finally getting serious about the gap between what ratings say and what defaults show.
A market where almost everyone gets an A
The numbers tell a story that borders on absurd. As of late 2018, over 95% of rated interbank bonds in China carried AAA or AA ratings. Only 0.11% were rated BBB+ or lower.
For context, nearly 50% of the outstanding amount of domestic corporate bonds held “Super AAA” or plain AAA ratings by the end of that year.
Meanwhile, corporate bond defaults were telling a very different story. Default volume surged from 1.26 billion RMB in 2014 to 128 billion RMB in 2018, a roughly 100x increase. The default rate climbed from 0.17% to 1.03% over that same period.
