China’s Debt Credit Rating Inflation Problem And Model Optimization

Since 2020,a batch of AAA-rated bonds in China have defaulted one after another,which has had a huge negative impact on the confidence of market participants.The issue of credit rating inflation in the bond market has gradually emerged,and external rating information has been seriously distorted.The fairness and authority of credit ratings are increasingly being questioned.How to fundamentally solve the various drawbacks of traditional external ratings based on the issuer-payment model,the optimization of the external rating model is realistic and urgent.This article argues that adhering to the basic principle of combining the government with the market provides a new perspective and solution to the problem of credit rating inflation.Specifically,compared with current traditional external ratings,market-implied ratings of Chinese bonds adopt a new model that combines investor and government participation,incorporating market information changes into the rating model and then providing incremental information to the market to improve the authenticity and validity of rating information.Accordingly,the orientation of credit rating model optimization is to make market-implied ratings an important supplement and verification method,and as an important part of further improving the construction of China’s credit system,promoting the sustainable,stable,and high-quality development of the bond market.This article selects general corporate bonds and medium-term notes issued in 2018 as research samples to explore the relationship between market-implied ratings and bond credit spread,and draws the following conclusions: First,compared with traditional external ratings,there is a significant negative correlation between market-implied ratings and bond credit spread,that is,the lower market-implied ratings,the larger bond credit spread,and market-implied ratings have a better ability to predict credit risk;second,for defaulted bonds,market-implied ratings are more forward-looking and flexible than traditional external ratings to adjust before bond defaults;third,the overall distribution of market-implied ratings is more in line with the risk characteristics of China’s bond market than external ratings.Based on the empirical test results,this article selects Yongcheng Coal and Electricity Holding Group Co.,Ltd.(hereinafter referred to as "Yongmei Holding")as a typical example of high-rated bond default.By describing the coal industry background,main business and financial status of Yongmei Holding,and other indicators,according to the rating model given by the traditional external rating agency CCXI,and the market reaction caused by the downgrade of market-implied ratings before the default of “20 Yongmei SCP003”,the following conclusions are drawn: First,traditional external ratings will give greater weight to the external support factors when rating local state-owned enterprises,and the external support factors are highly subjective,which affects the quality of external ratings to some extent;second,market changes implied ratings will cause the market to generate excess returns in the short term,indicating that market-implied ratings provide additional information,which has important guiding significance for revealing the potential credit risks of rated companies and helping investors make correct decisions.Based on the empirical test and case analysis,combined with the actual development of China’s bond market,the following countermeasures and suggestions are put forward: The first is to strengthen investor education.While understanding the financial and operating conditions of the target company,we should also pay attention to the actual financial situation of the shareholders and the government behind the company;the second is to optimize the internal governance of state-owned enterprises,establish a scientific and standardized enterprise management system,and divest or rectify the business sectors with insufficient profitability;the third is to change the single rating model of China’s bond market and adopt a complementary model combining market-implied ratings with traditional external ratings,focusing on cross-validation to improve rating quality;the fourth is to further strengthen rating supervision,improve relevant laws and regulations,promote the integration of the rating supervision system,and give full play to the role of investors in rating supervision.At the same time,enhancing investor protection,when the interests of investors are infringed by the false information disclosure of rating agencies,the departments involved should be substantially punished.