A Study On The Effectiveness Of China's Bond Credit Rating Under Regulation

This paper studies the effectiveness of China's credit rating under regulation,analyzes the determinant mechanism of domestic CRAs' independence and its specific manifestations,and proposes two types of response strategies for rating users from the perspective of rating business models and rating information forms.At the end of 2019,the stock of China's bond market was close to 99 trillion yuan,accounting for nearly 100% of GDP(99.1 trillion yuan).It has become the world's second largest bond market(after the United States).The bond market is important in China's capital market.In the bond market,rating agencies are important information intermediaries between bond issuers and investors.In the process of introducing thirdparty rating agencies as information intermediaries,maintaining independence and giving objective rating conclusions is critical.Goldstein and Huang(2020)used a model to study the real effect of rating opinions.They believed that the role of rating can be deconstructed into two parts: information effect and strategic effect.Among them,the information effect means that when the potential impact of the opportunistic behavior of the rating agency is not considered,the rating it makes can provide more information to market participants and play a role in improving economic efficiency;and when considering the opportunism of the rating agency,this part of the rating may damage economic efficiency,which is called the strategic effect of rating.Therefore,if the rating agency cannot guarantee its independence,the strategic effects that damage economic efficiency and the information effects exist at the same time,and the net effect of rating gradually declines with independence.In the mature capital markets of developed countries such as Europe and the United States,the independence of rating agencies is jointly determined by the conflicts of interest,the reputation capital accumulated by the rating agencies' long-term operations,and the regulation imposed by the regulators on the rating agencies.First,the pursuit of interests directly affects the independence of rating agencies.For example,under the current mainstream issuer-pay mode in the rating industry,the income of rating agencies comes from di rating fees paid by the issuer.In order to obtain direct rating fees,the rating agencies have an incentive to cater to the issuer,leading to“inflated” ratings.Second,the market reputation mechanism can reduce the opportunistic behavior of rating agencies.The reputation signal theory believes that in the situation of repeated games,companies will avoid short-term fraud in order to obtain long-term benefits(Klein and Leffler,1981).Finally,regulation is another way to reduce the opportunistic behavior of rating agencies.Regulatory agencies formulate a series of policies and regulations to regulate the behavior of rating agencies,and administrative forces will impose penalties on opportunistic behaviors of rating agencies,which can establish trust based on the system,thereby restricting the collusion of rating agencies and issuers.China's credit rating industry is under government regulation.First,regulators are the main users of credit ratings.China's credit rating market originated from the needs of regulatory agencies and has been branded with regulatory stigma since its inception.The main service targets of credit rating agencies are regulatory agencies,not bond investors.Secondly,China's rating industry has strict license control.Without a rating license issued by the regulatory authority,credit rating business cannot be carried out.Therefore,in order to avoid administrative penalties and maintain rating licenses,China's rating agencies have the motive to reduce opportunistic behaviors that distort ratings in pursuit of short-term rating benefits.Third,there are price controls in China's rating industry.The charges for rating services are guided by the regulatory authorities.The price of a single rating is basically fixed at a relatively low level,and rating agencies lose their free pricing power.How will regulation affect the independence of credit rating agencies?First,regulation replaces reputation as the dominant governance mechanism of credit rating agencies.As far as China's credit rating agencies are concerned,the main users of their credit ratings are regulatory agencies,and their business licenses are issued by regulatory agencies.In order to avoid administrative penalties and maintain rating licenses,rating agencies have the motive to reduce opportunistic behavior.As Zhang Weiying(2001)pointed out,excessive government regulation will undermine the formation of market reputation mechanisms.Therefore,we believe that in our country,regulation is the dominant govern mechanism for the opportunistic behavior of rating agencies.Existing studies have also shown that for China's credit rating agencies,the reputation mechanism has not worked(Huang Xiaolin,2017;Kou Zonglai et al.,2020).Second,the control and restraint mechanism is not perfect.From the perspective of capability,the government,as a regulator,is not omnipotent.For example,when faced with non-standardized information such as textual information,compared with market investors who work together,the regulatory capabilities are flawed and it is difficult to formulate quantitative regulatory standards.From the perspective of motivation,we should not presume that the purpose of government control is to maximize social and economic benefits.For example,out of the need to maintain social stability and the protection of state-owned property rights,China has a tradition of implicit guarantees and rigid payment for state-owned enterprises.Third,rating price control and bond issuance access control have led to new manifestations of rating benefits.On the one hand,because rating fees are kept at a low level under guidance,a single rating fee is not very attractive to rating agencies.On the other hand,due to the existence of bond issuance regulation,it has increased the motivation of bond issuers to collude with rating agencies to meet the issuance threshold.Rating benefits may turn into non-rating income or illegal private income of rating agency management.It may appear as a rating benefit in the form of "rating business opportunities."To sum up,under the control of China's credit rating,its independent decision mechanism is different from that of the developed capital market,there may be new manifestations of rating benefits,and the governance effectiveness of the regulatory constraint mechanism is not yet known.Taking the corporate bonds and medium-term notes issued in China from 2007 to2018 as samples,and using the value correlation model of credit ratings to measure the information effects of ratings,we have empirically tested: 1)The current status of effectiveness of China's credit ratings and changes before and after the break of rigid payment;2)The specific manifestations of the rating benefit mechanism and regulatory constraints faced by China's rating agencies and their differences in the role of companies with or without implicit guarantees;3)Whether new business model or text information can bring about an increase in information for rating users.Specifically,the research in this article found the following conclusions.First,we found that China's credit ratings have value relevance.Since 2014 when the rigid redemption of China's bond market has gradually broken,regulatory pressure has led rating agencies to actively increase their independence,and the value relevance of credit ratings has been enhanced.We also use two other mainstream methods to verify the validity of China's credit rating.On the one hand,judging from the market response to credit rating adjustments,although China's credit rating adjustments are less frequent,they have a certain amount of information.On the other hand,from the perspective of credit rating's ability to predict actual default events,it is still insufficient.Secondly,this article argues that rating interests and regulatory constraints are the determining mechanism of China's rating independence,and their empirical findings are as follows:(1)The specific manifestation of rating interests in China is the potential business opportunities that the issuer's interest group can bring to rating agencies,The greater the rating benefit,the worse the effectiveness of credit ratings;(2)The specific manifestation of China's regulatory restriction mechanism is the intensity of law enforcement by regulatory agencies.The greater the regulatory intensity,the higher the effectiveness of credit ratings.Furthermore,we found that the implicit guarantee feature of the issuer would inhibit the regulation from exerting a restraining effect and prompt the credit rating agency to further favor the issuer's interest driven by the future rating interests,thus reducing the effectiveness of credit ratings on the whole.Again,we compared the ratings of different business models.We found that,on the one hand,the rating benefits weaken the rating effectiveness of the issuer-paid institutions,but enhance the rating effectiveness of investor-paid institutions(CBRC),which has an independent advantage;on the other hand,the Granger Causality Test results show that,Compared with the issuer's paid rating,the timeliness of CBRC 's credit rating is poor.Overall,our test results show that on the basis of issuer-paid ratings,the investor-paid ratings provide incremental information.Finally,we studied different forms of rating information.We believe that,on the one hand,because regulators face information and capacity constraints,it is difficult to set a quantifiable standard for non-standardized information as the entry threshold for bond issuance,which makes issuers and rating agencies lack the ability to distort rating texts.On the other hand,under the regulatory restriction mechanism,the regulatory authorities have put forward detailed requirements for textual information,always emphasizing the role of rating report texts as a basis for rating opinions,and there is indeed a review of rating reports in regulatory practice.Our empirical results show that the greater the intensity of supervision,the stronger the value relevance of the tone of the rating report,and overall,the tones of the rating report provide incremental information.The research content and conclusions of this article is of great theoretical and practical importance.First,based on the regulatory characteristics of China's bond market,this paper proposes an analysis framework for the effectiveness of China's rating.It believes that the determinant mechanism for the independence of China's rating agencies is to balance between rating interests and regulation.Second,this article studies the impact of government regulation on the effectiveness of ratings,using credit ratings as an example to reveal the duality of regulation.Third,the empirical results show that China's credit rating do have value relevance,and regulation can improve the effectiveness of credit ratings,forming an important supplement to the literature on the effectiveness of credit ratings.Fourth,we found that rating benefits can be expressed as a new form of business opportunities for the issuer's interest group,and examined the comprehensive influence and mechanism of the rigid redemption tradition and the issuer's implicit guarantee on the effectiveness of ratings.The reasons for the lack of effectiveness of ratings might be special government regulation and unique property rights system.Fifth,this article proposes two coping strategies.One is to compare the rating results of different business models,and the other is to interpret the text information of the credit rating report.We found that these two coping strategies can help credit rating users obtain more private information and strengthen their understanding of ratings.