China is readying new regulations governing credit ratings of bonds traded in the inter-bank market in a bid to boost activity in the fledgling sector, two sources close to the regulator told Reuters.
The new rules, to be published within weeks, cover ratings from firms that charge bond issuers for coverage, as well as those paid for by investors and ratings generated from publicly available information, the sources told Reuters, requesting anonymity as they are not authorized to talk to the media.
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The National Association of Financial Market Institutional Investors (NAFMII), appointed by the central bank to help supervise the inter-bank bond market, is finalizing the new rules. The existing supervision system was launched in 2006 by the central bank and covers only issuer-paid ratings.
"Compared with the broad-brush style of the existing rules, the new guidelines provide a clear specification for three kinds of rating models in the industry for the first time," said one source at a domestic rating agency who said he was aware of the planned rule change.
Critics of the issuer-paid rating model say it prevents objective risk assessment and say its lies at the heart of the 2008-09 global financial crisis, triggered when complex U.S. structured securities turned out to be excessively risky, despite their top-notch credit ratings.
To break with the mainstream western pricing model, China set up its first credit rating firm in 2010 that charges investors rather than borrowers for evaluating a new bond.
China's bond market is divided into three parts: debt instruments in the interbank market overseen by the central bank, enterprise bonds approved by China's economic planning agency, and a small listed corporate bond market overseen by the China Securities Regulatory Commission.
The regulatory sources said the new rules are expected to apply only to products trading in the inter-bank bond market. But analysts said increasing convergence of the three bond markets could see effects felt by the other two.
The outstanding value of corporate debt instruments on the inter-bank bond market - including short-term financing bills and medium-term notes - totalled 3.7 trillion yuan ($589.45 billion) as of August, making up 60 percent of all corporate bonds in China.
China has three major ratings agencies - Dagong Global Credit Rating Co, China Chengxin international and China Lianhe Credit Rating Co - that have a combined market share of more than 95 percent, according to local media reports.
Dagong is the only wholly Chinese-owned firm of the trio. The other two are tie-ups with international partners, with Moody's and Fitch Ratings holding 49 percent stakes in each respectively.
Dagong said last week it would form a partnership with U.S. agency Egan-Jones and Russia's RusRatings to build a new international ratings agency to challenge the existing "big three" of Standard & Poor's, Moody's and Fitch.
Foreign ratings firms are not allowed to directly rate Chinese domestic currency bonds.
($1 = 6.2770 Chinese yuan) (Reporting by Aileen Wang, Zhang Shengnan and Nick Edwards; Editing by Kim Coghill)