Research On The Test Of Credit Rating Quality In China

After the financial crisis, domestic and foreign regulatory authorities and research institutions have had in-depth discussion and reflections about the procyclicality of credit rating in the crisis, using of credit rating results and the impact of credit rating on financial markets, especially the position and function of credit rating. In this process, we formed the following consensus: the development of credit rating is very important to a country’s capital market, and if credit rating loses credibility, it will not only increase investors’ risk and endanger the capital market, but also under some other economic conditions will affect a country’s stability, and what’s worse will lead to a global financial crisis. The regulatory authorities and market participants put great attention on the quality of credit rating, leading people to think more about how to evaluate and test the quality of credit rating. Besides, this will strengthen the constraints of credit rating agency through market mechanism, urge credit rating agencies to improve credit rating quality, so as to protect investors and promote the stability and development of financial markets.Credit rating provides professional credit risk analysis conclusions to investors and market participants, and to a large extent the rating results determine the market price of financial products. So, the quality of credit rating becomes the foundation to test the effectiveness of the ratings. The well-known international credit rating agencies began to research and analysis about the quality test of credit rating. Then international scholars also follow the research in this field, and as a representative, Kurosawa(2007) elaborated the credit rating test system and analyze the framework of credit rating quality test.The test of credit rating quality mainly focuses on two aspects: the consistency and stability of credit rating. Because the credit rating consistency test includes direct and indirect test, the credit rating quality test system can be summarized as: direct consistency test(default rate test), indirect consistency test(spreads test), and stability test(migration matrix test). The direct consistency refers to whether there is consistency between the default rate of bond issuers and its credit rating level, whether the credit rating level is consistent with the credit risk of the rating object, and credit rating results from different rating agencies should be consistent; indirect consistency, also known as credit spreads, refers to the evaluation of credit risk according to the rating results, different credit rating levels reflect different default risks, credit rating and credit spreads have high correlation. Stability refers to whether in a long term the credit rating maintains stable, which is always reflected by migration matrix.This paper reorganizes the theories and articles about the credit rating quality test from both domestic and foreign countries, based on the analysis of credit rating consistency and stability, and elaborated the logic and method used in credit rating consistency and stability test, combining data of China’s bond market, conducts credit rating quality test and default rate analysis using empirical analysis method. This paper also analyzes the difficulties of constructing the credit rating quality test system, as follows: the default rate test cannot be applied for lack of default events and data; spreads test is greatly influenced by factors other than credit; migration matrix is constrained by external factors. To solve these problems, this paper put forward specific suggestions to improve and perfect our country’s credit rating quality test system: first, build the credit rating system based on default rates; second, distinguish between credit rating quality test index and credit quality test index; third, track and adjust credit ratings in time; four, weaken credit spread test function gradually; five, strengthen the construction of database; six, gradually build the credit rating quality test system, mainly based on default rates, combining migration matrix and credit spread test. Through the research of our country’s credit rating quality test system, this paper intends to discover methods to objectively reflect the professional ability and market credibility of credit rating agencies, providing a reference to evaluation for investors and regulators.In addition, this paper analyzes the problems existing in credit rating industry in China which are reflected in empirical study: direct consistency teat, also known as default rate test is difficult to conduct, reflecting shortage of default events in bond markets of China, which is not conductive to the development of rating markets; in indirect consistency test, known as credit spread test, there is no significant difference between issuance spread and trading spread of different credit rating bonds, reflecting the low technical levels in credit rating and weak competitiveness; in stability test, known as migration matrix test, increased ratings proportion is higher than decreased ratings proportion, reflecting a potential conflict of interest problem in credit rating agencies. By analyzing the causes of these problems, this paper put forward some policy suggestions to promote the standardized development of credit rating industry, to enhance its credibility, in order to reveal credit risk and reduce information asymmetry, improve the operating efficiency of China’s bond markets and promote the stability of bond markets in China.