The market for Chinese corporate bonds is huge, and its profile makes it potentially very attractive for international investors. Nonetheless, it remains largely unknown as many still have limited awareness of the true characteristics and fundamental creditworthiness of China’s corporate bond issuers, and they are also unfamiliar with the domestic credit rating agencies. Analysis by external parties indicates that the market prices China’s corporate bonds as being less creditworthy than their ratings imply.
Using our proprietary creditworthiness model, we present our own ratings of the China onshore credit universe in accordance with international credit-rating norms, giving an overview of the credit quality of the China corporate bond universe that we believe is therefore comparable with other credit markets worldwide.
Executive Summary
- The China onshore credit market is worth more than $6 trillion and has a favorable risk profile relative to other risk assets, but it remains under-utilized by international investors due to difficulty of access and the challenges posed by domestic credit ratings.
- We apply our proprietary creditworthiness model to assess a universe of more than 2,000 Chinese corporate bonds that report their financial results and are not Local Government Financing Vehicles (LGFVs).
- We use the model results to categorize each of the bonds in accordance with international credit-rating norms.
- The results look quite different from what is implied by domestic ratings, which not only casts doubt on the validity of using those ratings exclusively, but also gives an overview of the credit quality of the China corporate bond universe that we believe is comparable with other credit markets worldwide.
- Over time, we believe that regulatory reform will improve capital allocation efficiency and increase the default risk in the China onshore credit market, while more involvement by international credit rating agencies will improve transparency and build trust among international investors.
- While our analysis suggests that the market pricing is more discerning than the domestic rating agencies’ assessments, credit selection drawing upon independent research still has meaningful scope to add value.
Do Domestic Credit Ratings Tell Us Much?
Comparison of actual domestic credit ratings with market-implied ratings for 2,000+ corporate bonds
Source: CCDC, Wind. Data as of March 2020. “Market-Implied Rating” refers to the ChinaBond Implied Ratings methodology, which combines domestic creditworthiness per category with the corresponding interest rate curve as a reference for each issue.
