A Comparative Study Of Bond Credit Rating Systems

China’s bond market started in 1981 and for the next 33 years there was no record of default until March 2014 when the listed company "Chaori Sun"(now renamed GCL Integrated)defaulted on the interest on its bond "11 Chaori Bond",breaking the rigid payment situation in the bond market.At present,the number of bond defaults reaches more than 100 each year,and the scale of defaults remains at a level of about RMB 150 billion.In the context of frequent bond defaults,it has become more important to build a mature and scientific risk control system than to pay high attention to bond defaults,and credit rating.So improving the quality of credit ratings which is an important part of the upfront risk control work has become an issue that regulators and practitioners need to focus on.The credit rating industry officially entered the era of unified regulation with the issuance of the Interim Measures for the Management of the Credit Rating Industry in 2019.And the release of the Notice on Promoting the High-Quality and Healthy Development of the Credit Rating Industry in the Bond Market in the second half of 2021 means that the regulator has clearly put forward requirements on the quality of credit rating,and it has become urgent to enhance the ability of credit rating to identify risks,differentiate risks and warn risks.Based on this,this paper will focus on two core questions: " What are the differences in the quality of the different credit ratings that are currently available?What are the reasons for the differences in quality and possible directions for improvement?”,and will develop the research from a comparative perspective.This paper begins with a theoretical analysis,examining issues such as the definition and classification of credit ratings,and focuses on the differences between external and implied credit ratings in terms of rating methods and characteristics.The paper then presents hypotheses based on the theoretical mechanism analysis and conducts an empirical analysis,using logit regression and multiple regression analysis to compare the differences between external and implied ratings in terms of their sensitivity to default events,accuracy in predicting default events and their ability to explain financing costs.Based on the results of the quality comparison,the paper then explores the differences in the information reflected(or focused)by external and implied ratings,using the construction industry as an example,in an attempt to identify the reasons for the quality gap between the two.Through the above analysis,this paper concludes that:(1)Implied ratings are overall better at predicting defaults and explaining bond financing costs.In terms of the construction industry indicator system established in this paper,implied ratings can reflect the information in the system more comprehensively than external ratings,and the grades of implied ratings are more likely to be influenced by the issuer’s own operating and financial conditions,as well as some operational debt servicing indicators.From the information point of view,raising the attention to these levels of information can help credit rating to improve its risk identification and early warning capability.(2)Based on the comparison,some more abstract insights can also be obtained: Credit ratings of various types and in various ways can improve the absorption and digestion of information and help investors identify risks more effectively;among them,higher quality credit ratings will also push back the development of lower quality credit ratings.In addition,in the specific rating work,we should not be confined to the existing scoring framework of a particular industry,but should make reasonable adjustments to the factors to be considered,taking into account the industry segments and the business characteristics of the enterprises themselves,and maintain a specific attitude to analyze specific problems.