(China Daily)
Updated: 2007-12-03 11:54

Analysts say further efforts should be made to associate credit ratings with the pricing of corporate bonds because in mature markets, the ratings from an independent third party are decisive in setting the coupon levels of corporate bonds.

"The corporate bonds issued that are guaranteed by banks cannot truly reflect the credit status of the issuers and undermines the market mechanism in the allocation of credit and prevents the credit market from pricing risks effectively," says Li of KBC.

To date nearly all corporate bond issues in China came from large State-owned enterprises that have the highest rating of AAA. In nearly all cases, credit risks are borne by the banks rather than investors.

Follow-up ratings have yet to be developed after a company issues an initial corporate bond. It has prevented investors from making longer-term assessments of a company's credit status and building awareness of the potential credit risks involved, analysts say.

According to common international practice, the default rate in a bond market is widely accepted as a barometer in assessing the accuracy of credit ratings. But analysts say at the present stage of development, China's debt market is lacking in an objective default rate curve, which has to be calculated by longer-term historical data.

"By providing more comprehensive historical market data, the further development of China's bond market itself will in turn promote the functioning of the credit rating system," says Yan of China Chengxin.

Bond experts and analysts advise the inclusion of corporate bonds with differing credit ratings to further expand the market scale and attract more investors with varying risk appetites.

"China's corporate bond market is not complete without the participation of small and medium-sized enterprises," says Gong Yangshu, a professor on finance of Shanghai University of Finance and Economy.

"Compared with the large companies with high credit ratings, small- and medium-sized enterprises have more urgent need for direct financing through issuing corporate bonds."

"There are growing numbers of medium-to-small enterprises approaching us to consult with bond issue plans," says Yan of China Chengxin.

"With the further expansion of corporate bond market, more and more enterprises with diversified credit ratings are expected to participate."

Small and medium-sized enterprises (SMEs), which are the engines of economic growth and job creation in China, have relatively little access to bank loans and the corporate bond market.

Despite their critical role in the economy, SMEs for long were forced to rely on retained earnings and informal private financing channels to expand their businesses.

Experts and analysts also warn that risk prevention should be put at premium to well protect investors' interest when lower rating bonds are introduced to the market.

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