In recent years, the credit rating landscape in China has undergone significant changes, marked by a series of downward adjustments across various sectors. These adjustments have shown distinct patterns, including an increase in downgrades, a surge in mid-year activity, concentration in AA-rated entities, and frequent cuts in overcapacity industries such as steel, chemicals, and machinery. As we approach the next two months—a peak period for rating revisions—investors are advised to closely monitor credit risk.
Credit ratings typically fall into two categories: debt ratings and entity (or subject) ratings. Additionally, rating outlooks also play a crucial role in assessing future performance. From January 2009 to June 2014, there were 94 debt rating downgrades, 108 subject rating reductions, and 165 outlook revisions, affecting a total of 994 bonds. However, due to repeated downgrades by different agencies and subsequent revisions, the actual number of affected entities was slightly lower than these figures suggest.
Analyzing the trends, it becomes clear that the number of rating downgrades increased significantly between 2012 and 2014 compared to the earlier period. Moreover, June and July saw a higher frequency of downgrades, with 77 out of 127 subject rating cuts occurring in those two months in 2013 alone. This trend is partly driven by regulatory deadlines, such as the requirement for rating agencies to issue credit tracking reports by June 30th, making this date a key point for annual rating adjustments.
Another notable pattern is the concentration of rating migrations on AA-rated bonds. Out of 108 subject rating downgrades, 34 were from AA to AA-, and similarly, 33 out of 94 debt rating downgrades occurred within the same range. Overcapacity and high-debt industries, such as steel, mining, and electronics, have been particularly affected by these adjustments.
Looking at the impact on bond prices, data reveals that following a rating downgrade, there was a noticeable decline in bond values. For example, among 436 bonds affected by entity rating downgrades, price drops were observed in the first 14 days after the adjustment, with cumulative returns showing a negative trend. Similarly, debt rating downgrades had a more pronounced effect, with declines becoming more severe over time.
A notable event in 2014 was the default of Chaoyue Sun, which marked the end of China's "rigid payment" system. Despite being called the "first year of bond defaults," the credit spreads did not spike as dramatically as during the 2011 urban investment debt crisis. This was due to two main factors: the risks were more localized rather than widespread, and rating agencies had already made frequent adjustments, allowing market expectations to gradually incorporate these changes.
Looking ahead, it is expected that the number of rating downgrades in 2014 will be comparable or even exceed that of 2013. With the upcoming months likely to see a surge in rating adjustments, investors should remain vigilant and carefully assess credit risk to avoid potential surprises.
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