S&P Global Warns of Inflated Credit Ratings in China, Panda Bond Risks Underestimated
nashnova research
S&P Global's Asia-Pacific ratings head Christopher Lee warned that nearly 90% of China's credit-bond issuers carry AA or above ratings, and this extreme clustering is quietly funnelling hidden risk into the onshore market — especially as panda bonds open wider to foreign issuers.
How inflated are the ratings?
Among China's 6,500-plus credit-bond issuers, nearly 90% hold AA or higher ratings.
In the United States, the equivalent share is just 4.4% — a gap of more than 20 times.
This means → China's rating scale has almost lost its sorting power: most issuers crowd at the top, leaving investors with little ability to tell safer borrowers from riskier ones by rating alone.
How wide is the panda-bond risk gap?
Lee cited a scenario: a foreign issuer rated only "B" on the global scale could receive a "AAA" when issuing a panda bond — a renminbi bond sold onshore by an offshore entity — in China.
S&P data put the five-year cumulative default probability for "B" at 15.34%, while "AAA" implies near-zero default risk.
In plain terms = the same borrower is treated as "may not repay at any time" abroad yet as "the safest bond you can buy" in China — the risk has not disappeared; the rating simply fails to reflect it.
What are regulators doing about it?
Since April this year, the People's Bank of China has held a series of closed-door meetings pressing rating agencies to reduce the concentration of AAA ratings.
The campaign has already led to downgrades or withdrawals of ratings for multiple issuers.
Lee's assessment: regulators are "moving in the right direction."
Why is this especially urgent now?
China's credit-bond market has reached 37 trillion yuan (roughly $5.5 trillion), making it a critical corporate funding channel.
As the market opens further to foreign issuers, Lee stressed the need to "build a differentiated credit-tiering system."
This means → if inflated ratings are not substantively corrected before foreign capital accelerates in, onshore investors may unknowingly bear default risk far beyond what the labels suggest — a pivotal test of whether China's credit-pricing mechanism is mature.
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